# Fair Credit Score: Maximize Your Opportunities

If you have a fair credit score, generally defined as a FICO between 620 and 679, you probably already know that those really low advertised rates for credit cards,
and mortgages do not apply to you. However, you're much better off than consumers whose scores put them in the "poor" credit category. Borrowing may not be cheap, but at least it's available to you.

## Why People with Fair Credit Pay More

If you have a fair credit score, it's important to understand that lenders are not trying to punish you when they charge higher interest rates -- they just want the same return on investment for lending to you that they get when lending to someone with excellent credit, and to get that, they have to charge more.

Here's an illustration. Suppose Desert Credit Union wants to earn five percent on all of its loans, or \$50,000 for every \$1 million loaned out. However, it won't earn \$50,000 by charging five percent, because some borrowers don't pay them back. When that happens, the lender loses its interest income plus the money it loaned out. So the credit union has to charge extra to make up for the borrowers who default.

Desert Credit analyzes its records and finds out that borrowers default at different rates: while just one percent of people with excellent credit default, that increases to five percent for those with good credit, 15 for those with a fair credit score and 25 percent for people with poor credit.

Desert Credit expects to lose \$150,000 of every \$1 million it loans to borrowers with fair credit, so it will only have \$850,000 actually earning interest income. To end up with its original \$1,000,000, plus the \$50,000 it needs to earn, then, the Desert Credit has to charge a higher interest rate. To get from \$850,000 to \$1,050,000 in one year requires an interest rate of 23.53 percent. The table below shows how this works.

## Fair Credit Interest Rates

While the example above is just an illustration, people with fair credit do pay more than people with excellent credit for every kind of loan:

• Rates approximately .5 to .75 percent higher for 30-year fixed-rate mortgages
• Between four and seven percent higher for auto financing
• About five to seven percent higher for credit cards
• Approximately seven percent higher for unsecured personal loans