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Take Credit Now - Continued

A Suze Orman exclusive

How You Doing?
The folks at FICO break down credit scores into six basic ranges. Higher is better.

Typically any score above 720 is considered top-notch and will qualify you for the best deals. But in some instances lenders are going to want to see a score above 760 to snag a super offer like a zero-percent car loan. Here’s a recent breakdown of typical range categories used by lenders across the country:

Your FICO® Score
760 - 850
700 - 759
680 - 699
660 - 679
640 - 659
620 - 639

And here’s what interest rate you might qualify for on a 30-year fixed-rate loan, based on these FICO score categories.

Your FICO® Score
Your Interest Rate
760 - 850
5.42%
700 - 759
5.64%
680 - 699
5.82%
660 - 679
6.04%
640 - 659
6.47%
620 - 639
7.01%

Okay, I know your eyes are beginning to glaze over, so let’s go over a real-life money scenario. Let’s see how those percentages would play out on a $200,000 mortgage. If your FICO score is 760+, you’re looking at a monthly mortgage payment of $1,126 and total interest payments over the 30 years of about $205,000. But if your FICO score is, say, in the 640-659 range you’d be looking at monthly mortgage payments of $1,260 and total interest payments of nearly $254,000. That’s a $50,000 difference over the life of the loan!

Stick with me for one more bit of math, because it’s an eye opener. The difference between the two monthly payments is $134. If you were to turn around and invest that $134 a month of mortgage savings for those same 30 years, and you earned an average annual return of 8 percent on that investment, you would have nearly $200,000 saved.

See my point? A great FICO score can translate into a huge financial windfall.

The numbers are just as compelling if you’re in the market for a new car. With a top-range FICO score you are in good shape to snag a 5.9 percent interest rate on a $20,000 four-year car loan, which will run you $469 a month. However if your score is between 625-659, the interest rate jumps to 10.8 percent and your monthly payments bump up to $515. Over the life of the loan you will pay more than $2,000 extra in interest with the higher-rate loan. Doesn’t sound like much? Come on, it’s 10 percent of your original loan amount. That’s a huge penalty, if you ask me.


Now let’s focus on what to do if your FICO score isn’t in the top range.

Read Your Report
A bit of backstory is necessary here. Your FICO score is based on all sorts of financial info that is tracked by three major credit bureaus: Equifax, Experian, and TransUnion. The credit bureaus know how many credit cards you have, whether you pay your bills on time, and all the details on any loans you might have, such as mortgages and student loans.

Sadly, though, all this access to your personal records is no guarantee of accuracy. The truth is that the credit bureaus can have faulty info on you. An old account you paid off might show up as being unpaid. Or you may find that someone has hijacked your account—the epidemic known as identity theft—and is running up credit card and loan debt in your name.

These kinds of erroneous info can send your FICO score south.

So job one is to make sure the info on your credit reports is correct. Once you clear up any mistakes, your FICO score should improve. The good news is that a new federal regulation entitles everyone to a free credit report once a year from each of the three credit bureaus. If you live in the West or Midwest, you already can get your reports for free. Everyone else will be eligible for their free reports by September1. You can check whether you live in a state that is already eligible for free reports at www.annualcreditreport.com, as well as obtain your reports there.

And here’s a neat credit report tip for the new system: you can create an ongoing free monitoring system of your credit by getting just one of the three free reports every four months. For example, start with Equifax, and then four months later get the Experian report. Then four months after that, check your TransUnion report. And you can repeat this system every year. If you find any incorrect info, follow the directions on your report to file a dispute.

For more advice on boosting your FICO score check out my Five Ways to Improve Your Score.

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