Olympic divers and college-bound test-takers have a valuable lesson to teach U.S. borrowers: Getting a higher score can really pay off.
Lenders make well over $1 trillion in loans every year based in large part on credit scores developed by Fair Isaac Corp., a firm based in San Jose, Calif., that attempts to quantify which borrowers are most likely to repay the money on time. Borrowers with higher FICO scores are generally eligible to get bigger loans at lower interest rates.
But turning a good score into a great one can win you an even lower interest rate, and save thousands—even tens of thousands—of dollars for borrowers who take out a mortgage, buy a new car and use credit cards, experts say. In addition, consumers with sterling credit often have their pick of lenders and can sometimes use that leverage to pay lower loan fees.
Tens of millions of Americans carry credit scores that are just under the highest range. Some 32.8 million people have FICO scores between 700 and 749, on a scale of 300 to 850, and another roughly 36.4 million people have scores between 750 and 799. About 38.6 million are in the 800-to-850 range. Roughly 1% of the people with FICO scores, or around 2 million individuals, have a perfect 850.
Most lenders consider people with FICO scores of at least 720 to be prime borrowers, and generally charge them interest rates that are low—but not the lowest available.
When the best deals kick in can vary by lender and type of loan. But the benefits can be substantial.
For example, home buyers with FICO scores between 700 and 759 could get an interest rate of 3.983% on average on a $400, 000, 30-year fixed-rate mortgage with a 25% down payment, as of Jan. 6, according to Informa Research Services, a market-research company based in Calabasas, Calif.
Home buyers with FICO scores in the 760 to 850 range could get an interest rate of 3.821% on average under the same circumstances, which means they would pay $6, 194 less in interest in the first 10 years and $13, 366 less over the life of the loan. On “jumbo” mortgages, which are common in pricier real-estate markets, the savings could be greater.
Borrowers who want to boost their scores can take certain steps that will pay off within a month or two, and others that will raise their scores over many months or even years.
Here’s how to make your score stand out to lenders.
How FICO Scores Work
The first step is to understand how FICO scores are calculated—and the role your score plays in lending decisions.
Five factors go into a FICO score. The most important is your payment history, which accounts for 35% of the score. If you want a high score, the first piece of advice is the simplest: Pay your debts on time.
The second factor is the overall amount of money you owe—including how close you are to the limits on your credit cards—which accounts for 30% of the score.