Relationship Status: Your Credit Score and Loan Rates

The law of gravity rarely fails. If your credit card balances are maxed to the top of your available credit, your credit scores risk a nasty fall. After your credit scores crash, you can expect everything from mortgage rates to credit card interest and fees to blast toward outer space. Although it takes years to build a great credit score, it takes very little time to ruin it. Here's what can happen when the relationship between your credit score and creditors goes south.

Low Credit Scores Ruin Your Image with Lenders

You want to look your best for a date or job interview; it's also important to look your financial best when applying for credit. Credit scores provide lenders with a first impression of how you manage your finances. A low credit score goes over about as well as a stained shirt on a first date.

MyFICO, the consumer education website of Fair Isaac Corporation, which developed the FICO credit scoring system, shows that your FICO score can potentially cost (or save!) you thousands of dollars in extra mortgage interest. Here's an example, which is for illustrative purposes only, as mortgage rates change frequently.

MyFiCO estimates that if your FICO credit score is between 640 to 659 and you borrow a mortgage of $150,000, your mortgage rate would average 5.085 percent and your monthly principal and interest (P&I) payments would be $813.00. You would pay approximately $143,695 in interest over the 30 year term of the mortgage. If your FICO credit score is 760 to the maximum score of 850, your national average mortgage rate would be 4.042 percent, with monthly P&I payments of 720.00. You would pay $109,114 in interest over 30 years.

This represents potential savings of $33,581 over the interest charged for the 640 to 659 credit score.

It's Complicated: Credit Scores Impact More than Borrowing Power

Rock-bottom credit scores can cost you plenty, as credit card companies add fees and hike interest rates to buffer themselves against the risk of granting credit to customers with low credit scores.

Creditors monitor your credit standing regularly. If you have good credit now, but have financial problems in the future, your creditors may reduce or close credit lines.

The Federal Trade Commission (FTC) reports that high credit scores not only help you save on mortgages, loans and credit cards, but they can also impact applications for employment, insurance rates and utility services.

Good to excellent credit scores (FICO scores from 700 and above) qualify applicants for lower interest rates and fewer or lower fees.

You have more choices and opportunities to compare and negotiate credit terms with strong credit scores. Credit options for those with poor credit are limited and typically have very low credit limits and high costs.

Low Credit Scores, Fewer Financial Options

You've been out of work for six months, your significant other has left you, and there is a stack of bills sitting on the kitchen table. If you want to salvage your credit, you'll need to ask your creditors or a certified credit counseling service for help. Denial or avoidance only makes credit problems grow worse and more expensive to fix.

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