Getting a good deal on a loan or credit card is highly dependent on the borrower's credit score. Surely, that’s no secret.
What is surprising is how much money one can save by successfully boosting their credit score into the range lenders favor. Make no mistake, the sooner you do so, the better.
Case in point: A new study from Lending Tree estimates you can save $50,000 by hiking your credit score from the “fair” range to the “very good” range.
Credit scoring agencies consider the “fair” range to fall into the 580 to 669 FICO credit scoring range. The “very good” range stands between 740 to 749, Lending Tree reported.
That amounts to a monthly savings of just over $250, a figure that would likely help U.S. households battle inflation and high consumer goods prices. Total average monthly payments would be $3,029 with fair credit or $2,777 with very good credit — a difference of $252.
The study also noted that boosting your credit score has the largest impact on home mortgage costs. “A boost from fair credit to very good could lead to $40,041 in mortgage savings, accounting for 81% of the nearly $50,000,” the report stated.
Consumers with very good credit could save $12,654 on personal loans, $36,498 on auto loans, and $377,766 on mortgages if they get the lowest APRs instead of the highest, the study added.
“There’s very little in life that is more expensive than having crummy credit,” said Matt Schulz, LendingTree's chief credit analyst. “A low credit score could cost you thousands — or tens of thousands — of dollars over your lifetime in the form of higher interest rates and fees, and it could even keep you from getting that loan altogether.”
The good news?
Improving your credit score matters because good credit scores determine your loan prices, so it is important to keep your score healthy to help save money.
“Your credit score determines how much you end up paying for goods and services,” said TomoCredit chief executive officer Kristy Kim. “Raising your credit score by 100 points can save you $250,000 plus in your lifetime in fees and interest charges alone.”
Getting from “bad” to “good” to very good” with your credit score is going to take some time, so be diligent, but also be realistic.
“When trying to boost your credit score, it's important to manage expectations, and ultimately, the amount of time it will take to repair bad credit depends on how bad your credit is looking,” said Dugan Brown founder Wayne Brown.
Minor mistakes that have pushed someone toward bad credit are going to be easier to recover from than some of the major mistakes that can take years. That said, the effort justifies the means.
“Improving your credit from bad to good, from good to very good, and from very good to excellent is important to ensure you’re getting the very best interest rates on loans,” Brown noted.
To start that process, think strategically and be careful about spending beyond your means.
“Consumers really need to be careful about overextending themselves,” said OppFi chief executive officer Todd Schwartz.
Make Plastic a Priority
When exploring options for credit, consumers should carefully compare and consider their choices.
For example, when looking for credit, people should consider options that accomplish three things, Schwartz advised.
· Enable them to pay down their principal versus rolling over their debt continuously.
· Focus on creditors that report on-time payments to credit bureaus.
· Focus on creditors that don’t have any sort of fees like prepayment penalties.
“These important consumer protections will help ensure that consumers that do need credit are able to pay off their debt and emerge in a better situation,” Schwartz noted.
One personal finance area where shoring up debt can make a big difference in moving up the credit food chain is credit cards.
“Frequency matters,” Kim told TheStreet. “It’s better to pay off your credit card balance as frequently as possible no matter how big the dollar amount. Paying off your balance helps build your credit score and keeps your credit utilization rates low, which helps improve your credit score."
It’s also vital to know how to manage money and be financially literate.
“That’s especially the case during periods of high inflation, when people need to understand the pros and cons of the credit card accounts they open, understanding their credit score, and the market and economy,” Kim added.