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Your Credit Score and its Financial Impact

By Steve Schmidt
VP/Director, Credit Management & Administration, ESL Federal Credit Union

We have stated before how your credit score is often the most important three numbers of your adult life.

Not only does your score have an impact on whether or not you can be approved for certain financial products such as a mortgage, auto loan, or credit card, but if you are approved, the quality of your score can determine how expensive these products will be over the life of your loan.

Credit Score Classifications

FICO© and VantageScore© have been discussed before about the different components used to calculate your score. Both credit scores are on a 300-850 spectrum, but have different ranges classified as Excellent, Very Good, Good, Fair/Average, Poor, Very Poor/Bad. These ranges are shown below:

FICO and VantageScore Credit Score Ranges
Credit Score Classification FICO VantageScore
Excellent 800-850 750-850
Very Good 740-799 N/A
Good 670-739 700-749
Fair/Average 580-669 650-699
Poor N/A 550-649
Very Poor/Bad 300-579 300-549

Example of a Credit Score's Impact

As an example of how much impact on overall cost on a loan product your credit score can have, let’s go through an example. This example involves an auto loan, with payments calculated from ESL’s Amortizing Loan Calculator.

Scenario #1: 650 Credit Score

Let’s say you’re shopping for a new car with a 650 credit score (shown as being Fair/Average for both FICO and VantageScore). The car costs $20,000 and your credit score results in 8% APR.

Based on these numbers, you would owe $351 each month for your payment, and over the life of the loan would pay $20,031 toward the principal of your loan, and $5,241 in interest, bringing your total cost to: $25,272 (principal + interest = total cost).

Scenario #2: 750 Credit Score

Now let’s say you have a 750 credit score that results in 3% APR on the $20,000 car.

Based on that lower interest rate thanks to your higher credit score, your monthly payment would be $304, and over the life of the loan would pay $20,010 toward principal and $1,878 in interest, bringing your total cost to $21,888.

Total Cost Breakdown Comparison

Total Cost Breakdown Comparison
$20,000 Auto Loan Scenario #1:
650 Credit Score
Scenario #2:
750 Credit Score
Interest Rate: 8% APR 3% APR
Payment term: 72 months 72 months
Monthly payment: $351 $304
Amount toward principal: $20,031 $20,010
Amount toward interest: $5,241 $1,878
Total cost (principal + interest): $25,272 $21,888

Comparing $25,272 to $21,888, you are paying $3,384 more in interest over the course of the 72 months because of the interest rate impacted by your credit score. Imagine what the amount would be when applying these rates to more expensive vehicles, or a much larger purchase, such as a house, which can bring a list of additional expenses including taxes, utilities, and maintenance.

Key Takeaway: Your Credit Score Matters

Your credit score is a major factor that contributes to how high or how low the interest rates will be on loan products. While there are multiple factors that determine how much you will pay over the life of a loan, be it for an auto loan, credit card, mortgage, or personal loan, your credit score is a vital one you can positively impact. Make sure you know the factors that make up your score and how certain actions can increase it over time so that when the time comes to take out a loan you are in a position to secure the best interest rate possible.