How Much Money Can Good Credit Really Save You?
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Earning and keeping a good credit score is hard work. If you're currently struggling with less-than-perfect credit, you may feel like a decent credit status is something you'll never be able to achieve. But you shouldn't let yourself believe that, and you certainly shouldn't give up.
Good credit is worth the effort. It comes with a lot of perks, not the least of which is the fact that those higher credit scores can save you a bundle.
Wondering how much money good credit can really save you? Here are three examples to show you just some of the possibilities.
1. You might save money on your mortgage.
When you take out a mortgage to finance the purchase of a home, the interest you are charged can add up to tens of thousands of dollars over the course of the loan. Higher credit scores can often help you to qualify for lower interest rates on your mortgage. And while you may not think that the difference in a percentage point or two would have that much impact on your bottom line, you might be surprised when you take a look at the actual numbers.
MyFICO offers a free loan savings calculator which can help you figure out how much money you could save on a new mortgage if your credit scores were higher. Here's an example.
- 640 FICO Credit Score
On a 30-year mortgage for $350,000, you might pay somewhere around 5.7% interest, depending upon where you live and a few other factors. At 5.7% interest, your payment would be around $2,035 per month. Over the life of your loan, you would pay more than $383,000 in interest (assuming you didn't sell or refinance).
- 760 FICO Credit Score
With a 760 FICO Score, you might pay somewhere around 4.1% interest for the same 30-year mortgage loan. At 4.1% interest, your payment would be around $1,700 per month. Over the life of your loan you would pay a little over $260,000 in interest (assuming you didn't sell or refinance).
- Total Savings
When compared with a low-score borrower, a high credit score could save you an impressive $335 per month in the example above. That adds up to more than $120,000 saved over the course of a 30-year mortgage.
2. You might save money on credit cards.
Higher credit scores can help you to save in several different ways when it comes to credit cards. The first way is obvious. With better credit scores you're more likely to qualify for better interest rates, lower fees and better terms from credit card issuers.
Ideally you should pay off your credit card balances in full every month. That's the best way to manage your credit cards if you want to save money on interest and maximize your credit scores.
If you already have existing credit card debt that you're trying to pay off, good credit scores may help you again. A low-rate or 0% balance transfer credit card or a low-interest personal loan can be smart way to help pay down your debt faster. You're more likely to qualify for one of these attractive financing offers if your credit scores are in good shape.
Finally, good credit is an important key to qualifying for credit cards with the most coveted features and rewards. It's no secret that some of the best rewards cards feature impressive benefits which could net you free travel, cash back and other amazing perks. However, you'll need good credit scores (sometimes excellent scores) if you want to take advantage of the most attractive deals available.
3. You might save money on insurance premiums.
Did you know that credit scores might be affecting how much you pay for auto and homeowners insurance each month? In many states, the condition of your credit (specifically your credit-based insurance scores) can be used to price your insurance premiums. In fact, your credit might be more influential over the cost of your auto insurance than your driving record.
Why do insurance providers care about your credit? Believe it or not, your credit helps insurance companies to predict the likelihood that you will file a claim. The numbers show that people with higher credit scores are less likely to file claims and cost the insurance company money.
Before you jump to the conclusion that this practice is unfair, consider the following: If you've worked hard to earn good credit, your efforts could pay off in the form of lower insurance premiums.
How to Boost Your Credit Score
Want to improve your credit score? Here are a few tips to help you get started.
Check Your Credit Reports for Mistakes
Although the credit bureaus try their best to make sure your credit reports contain accurate information, mistakes happen. The bad news is that credit-reporting errors can damage your credit scores even if you don't deserve the penalty. You should check your credit reports often, ideally each month, to be sure that the information on your reports is correct. You're entitled to a free credit report from each of the three credit bureaus — Equifax, TransUnion, and Experian — once every 12 months from AnnualCreditReport.com. If you discover incorrect information, federal law gives you the right to dispute it with the credit reporting agencies.
Put a Stop to All Late Payments
Credit scores are designed to predict the likelihood that you will become 90 days late on any of the accounts on your credit reports within the next 24 months. If you already have late payments on your credit reports, it's more likely you'll pay late again. That makes you a risk in the eyes of lenders.
Even a single 30-day-late payment has the potential to impact your scores negatively. Over one-third of your FICO score (35% to be exact) is based upon the payment history of your credit reports. So, if your goal is a higher credit score, you have to break the late-payment habit once and for all.
Pay Down Your Credit Card Balances
Despite what some people believe, payment history isn't the only thing that matters when your credit scores are calculated. In fact, you can have flawless payment history and still have not-so-impressive credit scores. The amounts you owe, particularly on credit card accounts, are also closely considered whenever your credit scores are calculated. When your credit reports show heavy credit card utilization (i.e., you've charged up a considerable percentage of your available credit limit), your credit scores are likely to take a hit.
Here's the good news: If you pay down your credit card balances (preferably to $0), there's a good chance your credit scores will start to climb back up in the right direction.
Remember to be patient and not too hard on yourself when it comes to your credit improvement goals. If your credit isn't where you want it to be today, that's okay — as long as you have a plan to change your situation for the better. Be consistent with the baby steps above and you could start seeing some positive movement in your credit score before you know it.