You may not think about your credit score all that often, but a high score can have a big positive financial impact on your life and especially your finances.
A higher score allows you to lock in lower interest rates on loans, car insurance, and mortgages and qualify for higher rewards credit cards, which can result in money you can literally put back into savings or investments. In fact, bumping up your score from “fair” to “very good” can potentially save you $200,000 or more throughout your life.
A credit score helps financial institutions, or others that wish to loan you money or approve your financial worthiness in some way, determine whether you’re at risk of not paying for your loan or expenses. Three major organizations are in charge of providing this score: Equifax, TransUnion, and Experian. In exchange for a high credit score, lenders offer top-tier borrowers the lowest available interest rates and other benefits.
While you might not think a few percentage points in interest here or there can amount to much, you might be surprised to see just how large the effect can be. Here’s a look at how having a high credit score can translate to $200,000 cash back to you over time.
Why Does a Credit Score Matter?
Once you hit the age of 18 and can take out a credit card, you begin to earn a credit score, a number that will follow you, and determine financial outcomes, for the rest of your life.
This number will go up and down based on a number of factors such as whether you pay your bills on time, how much unpaid debt you’re currently holding, how many loan or credit accounts you have open, and how much of your available credit you’re currently using.
Low credit scores may mean that you will have trouble getting loans, or financing things you wish to buy, or are paying much higher interest rates to do so. High credit scores tell a lender that you’re low risk and make it more likely for you to finance things or take out loans.
Raising one’s credit score is always a good idea, but what if you could earn $200,000 by doing so?
Biggest Savings: Home Mortgage
As your home mortgage is likely the biggest expense you’ll ever incur, it’s also the place where you can save the most money by having a high credit score.
Although a number of factors go into what mortgage rate you’ll receive — including the type of property you’re buying, how large your down payment is and where you live — here’s an example of how mortgage rates can vary based on your credit score, according to CNBC:
Estimated cost of interest for a 30-year fixed rate $300,000 mortgage
- Credit score of 620-639: 8%
- Credit score of 680-699: 6.81%
- Credit score of 760-850: 6.41%
While these may not seem like huge differences, for this $300,000 loan, look at the difference in your monthly payment depending on your credit score:
- 620-639 credit score: $2,201
- 760-850 credit score: $1,878
And here’s the difference in the total amount of interest you’ll pay over the life of a 30-year loan:
- 620 credit score: $492,000
- 760 credit score: $376,000
As you can see from the calculations, bumping up your credit score from 620 to 760 could therefore result in monthly savings of $323. But even more significantly, this would translate to a total interest savings of $116,000 over the 30-year life of your mortgage.
Extra Savings: Auto Loans, Credit Cards and Personal Loans
If you hold an auto loan, a credit card or a personal loan, you can save in a similar fashion if you improve your credit score, although not to the extent of your mortgage savings.
According to Experian, here were the average loan balances by type for Americans in 2022:
- Auto Loan: $22,612
- Credit Cards: $5,910
- Personal Loans: $18,255
If you could lower your interest rate by just 2% for each of these loan types, your monthly payments would drop by an average of about $78 — about $935 per year.
What Are the Ranges of Credit Scores?
According to Equifax, here are the ranges of credit scores:
- Excellent: 800-850
- Very Good: 740-799
- Good: 670-739
- Fair: 580-669
- Poor: 300-579
You may have seen or heard of the term “subprime” when it comes to interest rates. Borrowers with credit scores below 670 are generally considered subprime borrowers, meaning they’ll pay higher interest rates on all types of credit.
Your initial goal, if you’re looking to save money on interest, is to move out of the subprime category and into the prime category. However, your ultimate target should be achieving “top-tier” credit, which for most lenders means a credit score of at least 740.
How Can You Boost Your Score?
Now that you can see the literal cash value of having a high credit score, you probably want to know how you can boost your credit score.
Start by getting a snapshot of your current credit scores by requesting your credit reports from the crediting agencies. This can show things that are affecting your credit that aren’t your fault, such as fraud or identity theft, as well as old, unpaid balances you might have forgotten about or accounts that went into collections.
When you have a solid picture, you want to start by paying down your debt until you reach a credit utilization rate of 30% or lower – meaning you hold no more than 30% of all the total credit limits on your cards or loans. As your credit score goes up, you can ask your credit card to increase your limit, which can lower this utilization rate.
You don’t want to apply for too many credit accounts, but you want to keep any existing accounts open. Closing them can reduce your score by lowering your credit utilization rate.
Additionally, if you are not in an easy position to do any of these things, there’s a unique program called CreditStrong designed to help people with low credit improve it easily. How it works is that CreditStrong actually takes out a loan, ranging from $1,000 to $10,000, from Austin Capital Bank, in your name. These funds are then deposited into an FDIC-insured savings account. Once you have paid the loan off, you’ve instantly built credit and increased your score. What’s unique about CreditStrong is that you don’t have to have good credit to get started.
However you can do it, working toward a higher credit score will mean money back in your bank, and a better chance at financing the life you dream of.
John Csiszar contributed to the reporting for this article.
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