The Impact of a Credit Score

Your FICO score does more than let potential lenders decide whether you’re a good or bad credit risk. Based on your score, creditors also determine your interest rate, which impacts your borrowing costs.

Consider the cost of a $15,000 car loan. With a good FICO score, your creditor might offer you a 4.5% interest rate. With a poor FICO score, you’re likely to pay a higher rate—say 15%—significantly increasing your borrowing costs.

At 4.5% interest:

• Loan: $15,000
• Loan terms: 60 months at 4.5%
• Payment: $280 per month
• Total cost of payments: $280 x 60 = $16,800
• Borrowing cost: $1,800

At 15% interest:

• Loan: $15,000
• Loan terms: 60 months at 15%
• Payment: $357 per month
• Total cost of payments: $357 x 60 = $21,420
• Borrowing cost: $6,420

With the poor FICO score—and the resulting higher interest rate—the same car costs nearly $5,000 more.

 

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