By Eva Norlyk Herriott
The world of credit is changing fast, and so are the benchmarks for what is considered good credit. In today’s tightening credit environment, people who once had good credit may find that their score no longer measures up, and that applying for a new credit card or loan suddenly is not as easy as it used to be.
Credit scores give credit card companies and prospective lenders a quick snapshot of a person’s financial situation and his or her ability to manage credit responsibly. Credit scores are just little three-digit numbers, but they pack a surprising punch. Your credit score not only affects whether you’ll get approved for a new credit card or mortgage loan, it may also affect your ability to land a new job or rent a place to live.
In today’s tightening credit environment, credit scores have become more important than ever before. At the same time, unfortunately, the benchmarks for what is considered excellent and good credit are changing, and people with a score that used to be considered good may discover that lenders now turn their nose up at their score.
According to mortgage brokers and industry professionals, while people with a FICO score of 700 to 720 in the past qualified for the best mortgage rates, today a FICO score of 740 is considered minimum to get the best terms. For the best deals on rewards credit cards, auto loans and home equity lines of credit, lenders nowadays want to see a FICO score of 750-760. On the lower end, a credit score of around 620 used to be considered subprime, today even a score below 660-680 is considered below average.
The tightening credit standards affect people with a high FICO score of about 750 or greater very little. If anything, people with excellent credit might find that they’re more popular with lenders than ever. People with lower credit scores, in contrast, are likely to really feel the bite of the tightening credit environment. They will find it harder to get approved for credit cards or loans, and when they do get approved, they will be charged higher interest rates and be given far less favorable terms.
A low credit score can cost you dearly in the long run. While a 1-2% uptick in interest rate may not seem like much on paper, it translates into both higher monthly payments and far higher interest charges over the life of the loan. For a 30-year mortgage, for example, for each $100,000 borrowed, those with stellar credit will pay $90,253 in interest over the life of the loan, while someone in the subprime credit category will pay $131,727, according to myFico.com (based on interest rates of 4.86% versus 6.67%). The monthly payments would be $528 versus $644, a $116 difference that in turn affects how much house you can afford.
In this environment, it’s important to be more cautious about maintaining a good credit score than ever. Aim to have a credit score of 750 or more. Follow the usual guidelines for keeping your credit score high:
- Pay all bills on time.
- Keep balances on credit cards and other lines of credit at 30 percent of available limits (preferably at 10%)
- Keep applications for credit, including credit cards, to a minimum, except when you’re shopping around for the best terms for a mortgage.
- Have a mixture of different loans and credit cards to demonstrate that you can manage debt effectively.
