Most people don’t think about their credit score on a daily basis, even as they use their credit cards, make their auto loan payment, or write a sizable check for their monthly mortgage. However, there’s a direct correlation between a good credit score and saving on all of these accounts – and more.
The top credit scorers typically save tens (or even hundreds!) of thousands of dollars over their lives, helping them pay off debt, amass savings, invest to retire comfortably, or achieve their other financial goals.
Meanwhile, consumers with subprime or even average credit scores get charged higher interest rates, fees, and see a lot of doors closed when they apply for new loans.
So how much money will a great credit score actually save you? Let’s take a look:
According to Bankrate.com, if your credit score falls between 600-679, the average U.S. credit card APR (annual percentage rate) is 22.9%
But if your score is in the 680-739 range, your APR drops significantly to 17.99%.
However, for the highest credit scores in the 740-850 range, the average APR is only 12.99%.
So how much can those lower credit card interest rates save you?
Looking at a popular tiered credit card with a $10,000 balance as an illustration, we see that with the lower 12.99 percent APR for high-score consumers, the monthly payment would be $297 for over five years to pay it off. But if you had that that higher 22.9% rate because your credit score was mediocre, that monthly payment would jump up to an astronomical $715…and for more than 7 years!
Therefore, keeping a great credit score could be the difference between paying $18,414 total to pay off this card or $44,330 – a whopping $25,000+ savings!
When it’s time to purchase a car and apply for auto financing, your rates and terms can vary widely. But one thing is for sure: a great credit score will save you a lot of money when you’re paying off that shiny new auto month-after-month.
According to VantageScore, which is the main purveyor of credit scoring for auto lenders, a typical $25,000 auto loan for a 5-year term:
- Below 550 Vantage Score (poor credit): 18.9% with $13,828 interest paid
- Below 620 score (subprime credit): 17.9% with $13,009 interest paid
- 620 to 680 credit score (average): 11% with $7,614 interest paid
- 680-740 credit score (good): 6.5% with $4,350 interest paid
- 740-850 credit score (excellent): 5.1% with only $3,375 interest paid
While a 760 is considered a top-notch credit score for mortgage lending, you’ll probably qualify for the best auto financing with a 720 or higher score. In fact, consumers with excellent credit scores may even qualify for 0% financing on new car purchases.
One of the biggest ways your credit score will save you huge bucks is when it’s time to buy a home. And unless you’re paying cash for that home, you’ll be applying for a home loan, with rates and pricing based heavily on credit score.
Assuming that the average sales price of a house is $343,300, with a mortgage of $274,640 (20% down payment) and a 30-year fixed mortgage:
Let’s start with a 5% interest rate just for illustration purposes (historically, that’s low, but right now it could be a little high):
Your monthly payment will be $1,474
Total payoff over 30 years is $530,758 (interest and principal payments)
But if you have a better-than-average credit score and qualify for a 4.5% interest rate on that same loan, your monthly payment will be $1,392 with a total payoff of $500,962.
And if you have a great credit score that grants you a 4% interest rate, that means you’ll only pay $1,311 per month with a $471,960 payoff
So how much will a good credit score save you when it comes to this typical mortgage illustration?
-Savings in 1 year (compared to a 5% rate)
-Savings in 5 years
-Savings in 10 years
-Savings in 30 years
And for a $500,000 home, the difference between a 760 and a 620 credit score could cost you about $150,000 or more in additional interest payments due to higher rates!
In fact, according to Michelle Chmelar, the vice president of mortgage lending with Guaranteed Rate, every 20-point step down from a 760 credit score could cost the borrower 25 basis points when it comes to pricing, as well as higher fees and closing costs.
Other ways a good credit score will save you money:
Qualify for the best credit cards:
With a top score, you’ll have the best credit cards jockeying for your business, offering the lowest interest rates (sometimes even 0% for a period), options for low or no annual fees, and great perks and rewards. The credit card companies will also gladly extend you higher balances. Together, this can save you hundreds of dollars every year.
Better car insurance deals:
You may not have known that car insurers also rate and apply coverage based on credit scores. While some states, like California, Hawaii, and Massachusetts, don’t allow car insurance companies to look at credit, in most states, you’ll see much lower premiums with a better credit score – saving you money.
Cheaper cell phone plans:
If you’ve walked into a store recently to buy a new cell phone, you were probably asked to authorize a credit score check. In fact, cell companies will require a hefty security deposit and might even charge you higher rates – or outright deny you a contract – if you have enough blemishes on your credit report.
Get approved for rental housing and apartments:
Most landlords include an authorization for a credit check when you submit an application, and your payment history is a pivotal factor in approving you for a lease. Likewise, if you have judgments from past landlords or collections from utility companies on your credit history, you can probably kiss your chances of getting that nice apartment goodbye.
Utility bill savings:
When it’s time to sign up for a new electricity, heating, water, or trash account, a bad credit score can cause some serious problems, In fact, most utility companies will charge increased security deposits – sometimes hundreds of dollars – for bad credit consumers.
Make the grade with student loans:
The average college graduate now leaves school with $37,172 in student loan debt, an increase of 6% (or +$2,200) over just last year. You better believe that a great credit score will help you qualify for lower-interest student loans!
Don’t miss out on your dream job:
A bad credit score can hurt you in ways that have nothing to do with taking out a loan. In fact, employers are screening their potential employees for credit score, especially with government jobs or those in the financial sector. It’s estimated that 1 in 4 Americans have been subjected to a credit score check when applying for a job, and 1 in 10 have actually been denied a job because of a bad score or something on their credit report!
Are you ready to start saving money? Let’s start with your credit score! Contact us for a free consultation and credit report.