Your credit score really is a very important piece of your financial life. You’ve probably heard that having a better credit score can save you money, but how much can it save you? One of the ways to answer that question is to first understand that your score is lumped into a range.
Being able to classify your financial habits in a credit score range makes it easier for lenders to decide what interest rate to apply to your loan. The higher your score, the lower your interest rate — and the more money you save.
How Much Money Could You Save?
Credit score ranges vary a little bit according to the type of loan you are applying for. What constitutes the difference between a “good” score and an “excellent” score is a little different for mortgage loans than it is for auto loans. The following images, taken from a tool at MyFICO that helps you see what how much you could save with a good credit score rating, illustrate the point:
As you can see, a lower interest rate results in lower monthly payments. Over the life of a loan, this can result in a difference of thousands of dollars paid. Someone with a credit score of 680 will pay $44 a month more on a mortgage than someone with a credit score of 760. If you actually paid the mortgage for 30 years — 360 months — you would pay $15,840 more in interest with the lower score. That’s a pretty sizable difference!
You can also see how different types of loans have different ranges. You can get the best car loan interest rate with a FICO score of 720, but you need to have a 760 if you want the best mortgage interest rate. This is because a car loan represents a smaller risk than a home mortgage. The car loan is small compared to a home loan. Plus, you have less time to run into financial trouble and default on a five-year auto loan than you do over the course of a 30-year mortgage.
It is also possible to see how the interest rate on the auto loan escalates as the credit score drops. You wouldn’t even be approved for a home mortgage loan with a credit score of 500. And if you do fall into the 500 – 589 credit score range for an auto loan, you have to be willing to pay an interest rate of more than 18%, and pay $175 more a month than if you were in the higher credit score range.
The good news is that you can improve your credit score. With good habits, like paying your bills on time, reducing your debt and being careful what kinds of credit accounts you open, it is possible to improve your credit score range — and possibly save thousands of dollars over the life of your next loan.
This is a guest post. Miranda Marquit is a journalistically trained freelance writer and professional blogger working from home. She has been a contributor for Mainstreet.com, Personal Dividends and several other sites.
The opinions voiced in this material are for general information and are not intended to provide specific advice and/or recommendations for any individual.