Most people focus on improving their credit scores because they’re ready to get approved for a major loan like a mortgage or car loan. A bad credit score makes it harder to get loan approval, which means people who don’t have the best credit scores have to postpone some major life decisions.
But, loan approval isn’t the only benefit of a good credit score. Understanding the link between your credit score and the cost of borrowing will show you how a better credit score will help you save money.
You’ll have a lower monthly payment and interest savings on a mortgage or car loan
Your credit score goal shouldn’t stop once your score is good enough to qualify for a mortgage or car loan. You want a credit score high enough to qualify for a better interest rate. Why? Because the interest rate directly impacts your monthly payment and the total cost of your loan.
Let’s look at the numbers.
Say, for example, you’re starting with a 620 credit score and you’re approved for a 30-year $200,000 mortgage. With that credit score, your interest rate would be around 5.13% (based on national average as of August 2017). Your monthly mortgage payment would be $1,089. Over the course of the mortgage, you’d pay $192,031 in interest on top of the actual mortgage cost. You total mortgage cost would be $392,031.
If you spend a few months working on your credit score and get approved with a 670 instead of a 620, your monthly mortgage payment would drop to $972 and the total interest paid on the mortgage would be $149,952. You’d save over $40,000 over the course of 30 years just by waiting for a better credit score to purchase a home.
We see a similar situation with auto loans. You can often get approved for an auto loan with a low credit score, but you’ll pay dearly. A 60-month $20,000 auto loan with a 550 credit score would have an astronomical 15.23% interest rate and a $478 monthly car payment.
If you were to be approved with a 630 credit score, your interest rate would still be relatively high at 9.78%, but your payment would drop to $423 and you’d save close to $5,000 in interest. And if you had an excellent credit score above 720, your monthly payment would be only $365.
You’ll save money on home and auto insurance
Many people are surprised to find out that even their insurance company uses credit scores to set rates. It’s true. Insurance companies say they have found a statistical link between credit scores and the likelihood of filing a claim. Raising your credit score shows you’re a less risky customer, helps you qualify for a better insurance rate, and allows you to save money.
You can save on credit card interest
Paying off a high interest rate credit card balance can get expensive. For example, you’ll pay more than $3,000 in interest to pay off a $5,000 credit card balance at 23% interest rate (if you’re consistently paying $150 each month).
Raising your credit score may give you some leverage to negotiate a lower interest rate. For instance, if your credit card issuer lowers your interest rate to 15%, you’ll pay a little more than $1,500. That’s half the amount of interest as before!
Or, with a good credit score, you can qualify for zero percent balance transfer promotion and move your high interest rate balance to the new card. If you make large enough payments, you can completely pay off your balance during the promotional period and avoid paying any interest at all.
You’ll have cheaper cell phone options
Every major cell phone carrier does a credit check before allowing you to purchase a new phone or establish new service. Having a bad credit score can limit your options. You may have to pay a security deposit or choose among higher-priced cell phone plans.
Security deposits can be several hundred dollars depending on the carrier and your credit score. Raising your credit score means you won’t have to pay a deposit and you’ll have more freedom over your cell phone and plan choice.
You’ll save on security deposits on utilities
Utility and cable service providers are a couple of other companies that check credit before establishing new services. After checking your credit score, a provider may require a security deposit to establish your account. Security deposits must be paid upfront and can be several hundred dollars. Typically, the deposit can be returned to you or credited to your account after 12 months, but the upfront payment might be tough to make.
Unfortunately, we can’t go without utilities so if a security deposit is required, it’s non-negotiable. Raising your credit score will allow you to establish utilities without having to cough up a security deposit. You can save that money or put it toward some of your other financial goals.
Raising your credit score can take time, but it’s worth the investment to save literally thousands of dollars over your lifetime.
This is a guest post by LaToya Irby. She is a credit educator and the founder of CreditRodeo, where she helps people understand how credit really works. Download her free guide to raising your credit score and get your credit in the best shape ever.