Question

You have a FICO score of 776 so you can borrow money at 4.2% interest. If your score is 495, you will have to pay 8.9% interest. How much less will you pay in simple interest in one year on a loan of $12,984 if you have a higher credit score?

Please show work and explain.

Answer 1

$611.63

Explanation:

To Calculate the amount of interest saved with a higher credit score, we need to find the difference in the amount of interest paid over the course of one year on a loan of $12,984 at each interest rate.

First, we'll calculate the interest paid at 4.2% interest with a FICO score of 776:

Interest rate = 4.2%

Loan amount = $12,984

Simple interest = Interest rate x Loan amount

Simple interest = 4.2% x $12,984

Simple interest = $545.45

Next, we'll calculate the interest paid at 8.9% interest with a FICO score of 495:

Interest rate = 8.9%

Loan amount = $12,984

Simple interest = Interest rate x Loan amount

Simple interest = 8.9% x $12,984

Simple interest = $1,157.08

The difference in interest paid is the amount saved by having the higher credit score:

Interest saved = Interest paid at 8.9% - Interest paid at 4.2%

Interest saved = $1,157.08 - $545.45

Interest saved = $611.63

Therefore, having a higher credit score of 776 would save you $611.63 in simple interest over the course of one year on a loan of $12,984.

Answer 2

$610.25

Explanation:

The simple interest at a higher FICO score over the lower FICO score
= 8.9% - 4.2% = 4.7%

4.7% = 4.7/100 = 0.047 in decimal

Therefore at simple interest the amount of money saved for 1 year on a loan of $12,984

= $12,984 x 0.047 = $610.25