We have all seen the advertisements, such as: “0% APR”, or “No interest, no payments for 90 days”, or “90 days same-as-cash” offers. Then the kicker (On Approved Credit). So what EXACTLY does this mean to you and I?
Chapter 1. What Is A Credit Score?
A credit score is the mathematical opinion about your ability to repay any loan generated by a credit scoring company. There are many different credit scoring companies out there, all of them use their own proprietary mathematical credit scoring algorithms to process information from your credit report into a simple number. Thus, your credit scores. We all have 3 separate credit scores, regardless of who is processing the credit score. We have a score for Experian, Equifax, and TransUnion. These are the 3 most common credit reporting companies. The most widely used and trusted credit scoring company is FICO (Fair Isaac Corporation). FICO invented credit scoring in 1956, since they were the first; banks tend to use those most frequently.
Chapter 2. What Makes Up Your FICO Score?
- 35% Payment history
- 30% Amounts owed
- 15% Length of credit history
- 10% New credit
- 10% Types of credit used
The FICO scoring model ranges from 300 to 850. Scores from 680 to 699 are considered "good". Scores from 700 to 720 are typically considered "excellent".
Chapter 3. What Types Of Loans Can Different Scores Get You?
Section 1. Based on a 30 year fixed rate mortgage of $300,000 this is what your payments could look like:
- 780-850 @ 4.460% = monthly payment of $1,513
- 700-759 @ 4.682% = monthly payment of $1,553
- 680-699 @ 4.859% = monthly payment of $1,585
- 660-679 @ 5.073% = monthly payment of $1,624
- 640-659 @ 5.503% = monthly payment of $1,704
- 620-639 @ 6.049% = monthly payment of $1,808
Section 2. Based on a 36 month auto loan of $25,000 your payments could look like this:
- 720-850 @ 6.039% = $761.00 per month
- 690-719 @ 7.587% = $779.00 per month
- 660-689 @ 8.980% = $795.00 per month
- 620-659 @ 11.738% = $827.00 per month
- 590-619 @ 15.483% = $873.00 per month
- 500-589 @ 16.140% = $881.00 per month
As these potential rate charts illustrate, there could be MASSIVE savings the better your credit score gets.
Chapter 4. How Do You Rate With The Rest Of Americans?
The average FICO credit score in America is 692 which if you were to apply a letter grade to this score would probably is a “B.” So I suppose you could say that the Standard & Poor’s downgrade of Americas AAA credit rating to AA+ is probably in line with what is happening with American’s personal credit ratings overall.
To see your own FICO scores for Equifax, TransUnion, and Experian you can purchase these scores at www.TrueCredit.com.
If you’d like to read more tips on improving your credit score read the article "How to Improve your Credit Score For Free" for tips on what to avoid and strategies you can implement.
So the next time you see those obnoxious commercials on television and hear them on the radio, you now will understand what O.A.C and On Approved Credit really mean.