How Improving Your Credit Score Can Save You Thousands of Dollars
When you think of saving money, what immediately comes to mind? You might be thinking of ways to reduce your expenses or researching side jobs to earn extra cash. However, improving your credit score probably isn’t the first thing on your mind.
In fact, improving your credit score can help save you thousands of dollars in interest. Credit scores are one of the most important factors when a lender looks at your profile. There are other factors such as your employment history and income, but your credit score will still hold a large weight.
Renting an Apartment
If you’re looking to rent an apartment, the landlord or the property management company will check your credit score. If your score it too low, you might find it extremely difficult to lease an apartment. Now let’s say your score isn’t too shabby but isn’t excellent, what happens then? In this event, your landlord might require a higher security deposit. The standard security deposit is usually one month’s rent, but if your score doesn’t meet the requirement they might ask you for 1.5-2 times more.
So for example, if your monthly rent is around $1,500, your standard security deposit should be the same. However, having a lower credit score might cost you $2,250-$3,000 total just for the deposit. Think about what you can do with the extra $750-$1,500. You can pay off debt, put it into your emergency savings fund, or invest it.
Purchasing a Vehicle
According to MarketWatch, 62% of Americans have less than $1,000 in their savings account. So when it comes to purchasing a car, the majority will end up financing it instead of paying for it in cash. Getting auto financing isn’t as difficult since these loans are secured. Secured loans tend to have lower interest rates since it’s collateralized by an asset such as your vehicle or your home.
So how exactly does your credit score impact your bottom line when it comes to auto loans? Let’s say for example you’re financing $15,000 to buy a new car. If your credit score is in excellent condition, we’ll hypothetically say that your interest rate is 3.5% for 48 months. Your monthly payments will be $333/month and the total cost of interest will be $972.
Using the same example as above, let’s say you have a good credit score but not good enough to qualify for the best rates. If your rate is 6% for 48 months, your monthly payments will be $352/month and you’ll end up paying $1,909 in interest.
Lastly but not least, if your credit score is less than perfect, you might find it difficult to get a bank to issue you a loan. If you do, you’ll most likely be looking at high interest rates. If your interest rate is 12%, your monthly payments would be $395/month and you’ll pay $3,960 in interest.
The Biggest Financial Purchase, Homeownership
This is the biggest financial purchase we’ll make, and this is where having an excellent credit score will pay off. Since you’re financing a large sum of money, the slightest difference in interest rate can impact your mortgage payments.
According to MyFICO, a credit score 760+ may qualify you for a 3.087% rate on a 30 year fixed loan. Note, mortgage rates change daily and this interest rate is as of 10/4/2016. If we assume that you’re borrowing $200,000, a 3.087% will result in a $853 payment with $106,944 in total interest.
Now this is where things get a little tricky. Even the slightest difference in one point can impact your score. If you have a score between 700-759, your interest rate may be 3.309%. So the difference between a 759 and 760 score is a $24 monthly payment but a 3.309% interest rate will cost you $115,685 in total interest. That’s $8,741 in interest over a single point!
If your score is between 640-659, your interest rate may be 4.13% with a monthly payment of $970/month. Total interest paid is $149,157 which results in $42,213 more in total interest paid.
Saving money by improving your credit score is a bit unconventional at first, but it makes perfect sense. Your credit score will play an important role when lenders look at your creditworthiness so it’s imperative that you’re staying on top of your credit score. Services such as CreditKarma and Credit Sesame will provide you with a free credit score every month.
If you’re looking to improve your credit score, always make sure you’re paying your bills on time and continue to pay down your debts. Establishing good financial habits and cutting costs can help you improve your credit score over time.