21
May

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The fact of the matter is, the higher your credit score the less you will pay to borrow money for any purpose such as the purchase of a car, a home, a home renovation and even a vacation or things you buy on a credit card.

For both FICO scores and VantageScore 3.0, your credit score is a simple numerical rating from 300 to 850 that describes your credit history. The number is calculated based on information about your credit accounts stored in your credit report files at the three major credit bureaus (Experian, Equifax and TransUnion). The FICO score is based on five major categories of the your credit history which shows how you borrow money and repay it including the number of credit accounts you have and have had, the amount of money borrowed compared to the number of accounts open, your actual payment history and amounts owed and the type of accounts you have.

All financial lenders check your credit score to determine whether or not they want to do business with you at all and at what terms and interest rates.

I’ve even heard it said that companies use your credit score to actually disqualify you for the best loan terms and rates. Don’t believe it? I’ve played around with some loan calculators to show you some real-life examples of how much money a low credit score can cost you.

Mortgages

For mortgages, the best credit score is required to qualify for the best 30-year mortgage loan rates. The averages 30-year fixed loan rate as of April 2015 is 3.896%, according to bankrate.com. Let’s search for mortgage loans to see how your credit score affects the rates of loans offered, if the loan amount and down payment remain constant.

  • At a score of 740+, there are over five loans offered at under 3.8% and many more under 4%.
  • At a score of 700-719, the choice drops to three loans and only two offered under 4%.
  • At a score of 680-699, there are only two choices and both are over 4%.

So, you can see how your overall choice of loans drops as your credit score gets lower. Now, let’s check a total mortgage cost calculator to see how much this slight difference (not even a whole percent) costs over the 30-year life of a mortgage.

  • The total cost on a mortgage loan with a principle of 200,000 and a yearly interest rate of 3.5% is 360 monthly payment of $898.09 for a total of $323,312.18.
  • The total cost on a mortgage loan with a principle of 200,000 and a yearly interest rate of 4.0% is 360 monthly payments of $954.83 for a total of $343,739.01.

The difference over the 30 years of the loan is $20, 427. Do you want to pay $20,000 more dollars than you have to for your house and have a higher monthly payment just for having a lower credit score?

Car loans

When it comes to auto loans, lenders have categories for borrowers based on their credit scores as follows, according to Experian (which uses the Vanguard 3.0 score):

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According to Experian’s 2014 report on the automotive market, the average amount of a new car financed was $27,429, so let’s see what a poor credit score will cost you.

  • A $27,429 loan at a super prime interest rate of 2.7% for five years will cost you $29,352.90 with a monthly payment of $215.62.
  • The same $27.429 financed with subprime credit at 9.25% will really cost you $34,362.88 with a monthly payment of $489.22.

Did you really want to pay over $5,000 more dollars for that car you might be tired of after five years? Do you also want to pay $273.60 more per month for your car payment just because you have a lower credit score?

Credit cards

Many credit cards are offering 0% interest deals for new card holders and for balance transfers for up to 18 months and after that, the interest rates increase to 9.99% at the very lowest for the highest credit scores. For those with poorer credit scores, the interest rate can rise to 15%, 20% and even as high as 29.9%. This matters only for those who carry a balance. Do you really want to pay that percentage more for everything (from a daily coffee to a big ticket purchase) charged on that card? Remember, while you will pay more for every item you charge, the interest actually compounds and adds to the balance causing it to grow even bigger, faster.

When it comes to borrowing money whether in a loan or by using a credit card, the higher your credit score, the more choices you will have of the lowest interest rates. This means you will pay less to borrow that money compared to someone with even a slightly lower credit score. And that is how having a higher credit score can save you money.


Posted in Credit Score