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How to Translate Your FICO Credit Score to Interest Rates
Interest rates vary based on your FICO score and loan type. Your FICO score, ranging from 300 to 850, shows lenders how well you handle your debts. Most home lenders don't lend to people with scores below 620, while car lenders may go all the way down to 500, but you'll pay for it. Home loan interest rates rise about 1.5 percent from the top to the bottom tier, while car loans can change more than 14 percent.
FICO, also known as the Fair Isaac Corporation, created the software that is used by credit bureaus to calculate credit scores. The three bureaus -- Equifax, Experian and Transunion -- use the software in their own way, which can cause some inconsistency in scoring from bureau to bureau. Also, not all creditors report to all three agencies, which can also affect your score. You can find your true FICO score at myFICO.com. Ninety out of the top 100 U.S. financial institutions base their credit decisions on the FICO score.
Interest rates for home loans have a tighter range than most other types of loans, but not many, if any, loans are available once you get below a certain level. The top-level scores -- 760 to 850 -- earn the lowest rates -- around 4 percent as of publication, while rates for the lowest scores increase about 1.5 percent. You'll pay about 0.2 percent more from 700 to 760. After that your rate rises about 0.2 percent for every 20 points you lose on your score until you get below 660, when it declines by about 0.5 percent per 20 points.
Interest rates for car loans have a wider gap between their highest and lowest rates, but car lenders lend money on much lower FICO scores. The top tier FICO range for auto buyers is 720 and above, as of publication. This tier earns you the lowest interest rate, about 3.2 percent, as of publication. The lowest range is 500 to 589, qualifying for a rate more than 14 percent higher, or more than 17 percent, causing the monthly payment on a $10,000 loan to leap from $292 to $358.
When it comes to auto loans, there are four levels between the top and bottom FICO tiers. You can expect your score to increase about 1.3 percent from 690 to 719, and over another 2 percent once you drop to the 660 to 689 range. From 620 to 659, the rate rises an additional 4 percent, until leaping nearly 5 percent as your score falls below 620. You can go to myFICO.com for interactive car and home loan tools that help you figure out your exact interest rate and payment amount --based on your FICO score.
Chris Brantley began writing professionally for a financial analysis firm in 1997. From 2000 to 2004, he worked as a financial advisor, specializing in retirement planning and earned his Series 7, Series 66 and insurance licenses. Brantley started his full-time writing career in 2012 and has written for a variety of financial websites, including insurance, real estate, loan and investment sites. He holds a Bachelor of Arts in English from the University of Georgia.
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How does your credit score affect your car insurance rates?
Your age, the type of car you drive and how many miles your vehicle logs each year can influence how much you pay for car insurance. However, another factor, can play a substantial role: your credit score.
Your credit score is used to help predict factors such as how likely it is that you’ll make payments on time, according to the Federal Trade Commission. Some insurance companies also use this information to help predict the likelihood of you filing an insurance claim, and even the amount of the claim.
Overall, when it comes to credit and car insurance, “the better your credit score, the better your rate is going to be,” says Beverly Harzog, a consumer advocate and credit card expert.
Who uses credit scores
By and large, most states allow insurance companies to use credit scores when setting car insurance rates. Three states California, Massachusetts and Hawaii do not let insurance companies use a consumer’s credit information for car insurance.
In the states where companies are permitted to consider a consumer’s credit, the majority of insurers take into account a consumer’s credit score for car insurance, says Rachel Jensen, associate counsel at the American Insurance Association, a trade organization.
Each insurance company uses its own system to develop a credit score. To do so, the company takes information from your credit report, such as if you pay bills on time and how many accounts you have. The company then gives points in each of these categories. The total number of points equals your credit score.
If you’re looking at getting an car insurance policy with a certain company and want to know whether that company uses credit scores to determine rates, you can call the company and ask. You also can contact your state insurance department to learn whether a company uses credit scores as a factor to determine car insurance rates, Jensen says.
Credit scores and car insurance rates
Here are four additional factors to be aware of when it comes to credit scores and car insurance rates.
1. A low score may mean higher rates.
If you have a bad credit score, an insurance company might be concerned about your ability to make payments on time. “They see that as a bigger risk for them and, as a result, your premium payments might be higher,” Harzog says.
If you have a low score, you could pay two, three or even four times as much for car insurance, says Birny Birnbaum, executive director of the Center for Economic Justice, a nonprofit organization that advocates for low-income and minority consumers. So if you have a high credit score and pay $800 a year for car insurance, that number might change to $1,600, or even more, with a low score.
2. Different companies use different scores.
When you apply for car insurance, the insurance company will pull your credit history and run it through the scoring model, Birnbaum says. Since insurance companies use different methods to find a credit score, the score you get from one insurance company most likely will differ from the one you get from another.
“Most insurance companies will use a tier rating system,” says Jonathan Peele, president of Coastline Insurance in Southport, North Carolina.
This means the company will set certain rates for different types of risks. Your credit score, as well as factors such as your driving record, all will be taken into account when determining that level of risk.
3. An accurate report is key.
Since most insurance companies use credit scores when setting car insurance rates, you’ll want to make sure the information that goes into that score is correct. You can order a free annual credit report at www.annualcreditreport.com.
“We suggest consumers check credit reports at least annually for accuracy,” Jensen says.
If you spot any errors, request that changes be made. Once the mistakes have been corrected, you can ask your insurance company to use the updated report to determine a new rate. That new rate could go into effect right away or within a certain time period, Jensen says.
4. You may be able to negotiate.
Certain factors can affect your score that have nothing to do with whether you’re financially responsible, Birnbaum says. If you pay bills on time, such as rent and utilities, but those companies don’t report to a credit bureau, that history of on-time payments may not be reflected on your credit report.
If you think your credit score doesn’t accurately reflect your overall financial picture, talk to your insurance company and ask about the possibility of lowering your current rate. If that isn’t possible, shop around, Harzog says. Other insurers may look at your credit score differently or may be willing to negotiate.
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