How a Higher Credit Score Can Net You $1100/Year
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For your average adult, any major purchase will require having good credit. Whether it’s your house, a car, etc. the better your credit score, the less you pay overall. This, of course, leads to improved financial health and shows exemplary debt management skills (which we’re all about here at Nav.it). But let’s not beat around the bush, how much are we talking here? According to LendingTree, upwards of $22,000 over the lifetime of your combined loans. That’s how much.
What Is Your Credit Score?
Before we go into how your credit score can save you money, let’s talk about what your credit score is.
Definition
Your credit score is a summary of your credit history that aims to predict your creditworthiness. Basically, how well you handled debt repayment in the past (student loans, auto loans, mortgage, etc.) tells credit companies how likely you are to repay money they lend you. There are several factors they use to determine this number, including, but not limited to:
- Payment History – The BIGGEST factor when determining your credit score is your history. Essentially, if you pay on-time (even minimum payments), you’re good in their book. Things like late payments, delinquencies, and defaults can tank your score.
- Credit Utilization – This is the ratio between how much credit you’re using compared to how much total credit you have. The rule of thumb here is to keep your utilization below 30% and you’re golden.
- Credit History Length – As straightforward as they come. This is simply how long you’ve had credit accounts open. The longer, the better.
The Pros (This is the cash part!)
Because your credit score determines your interest rate when taking out a loan, the higher your score, the lower your rate. Not only is this a key indicator of your improving financial health, but it can also save you money! When dealing with long-term loans like a mortgage, your monthly costs will be lower, thus saving you money over time. Overall, you could put almost $100/month back in your pocket to be used for savings, investments, or a little extra something for you for all your excellent debt management.
You’re also less likely to be denied for loans, meaning you’ll have access to making moves when you need to without a substantial wait while trying to find a better deal. There’s nothing more crushing than finding your dream house or car only to find out you can’t land the loan you need in time.
The Cons
Every coin has two sides (as long as you’re not cheating). Having “very good” to “excellent” credit does provide great benefits, but it gets rough from a “fair” rating and lower. Loans are likely to come with higher interest rates, costing you money you may not have to spend over time. There is also a higher chance of being outright denied, taking away opportunities that you would otherwise have access to.
It can also be quite the process to improve your credit score after a rough patch. Whether due to your own actions or simply intertwining your funds with someone less. . .financially responsible, you may find yourself in a position where you have a journey ahead of you before you see that “very good” rating. The financial stress that this can cause leads many towards detrimental shortcuts that only make the situation worse.
Refinancing: The Loophole
As your financial health improves, you may unlock this little “loophole” (it’s not really a loophole, just part of the financial game). If you started a loan when interest rates were high or when you had a lower credit score, you may be able to refinance for better terms down the road. Finally crossed that line from “fair” to “very good”? Give your lender a call and see if your new score can get you a lower rate. This is a good way to take advantage of your debt management skills while putting some cash back in your pocket.
What Do The Experts Say?
Depends on who you consider an expert. According to Dave Ramsey, there is “no good debt.” Whether you’re starting a business or going through a hard time in life, you should never go into debt in his opinion. Based on that, you’d never need a credit card, nor would you need to concern yourself with a credit score.
Matt Schultz, chief credit analyst at LendingTree, sees it differently. While understanding that bad credit can be detrimental to one’s financial health (going so far as to say, “There is little in life that’s more expensive than crummy credit”), having good credit opens doors for those who might not have any other option. Given the raising cost of just about everything, most people are using credit cards to make ends meet. So, when it comes to buying a home, a car, or needing a personal loan, Schultz says if you’re over 700, you’re doing OK, but the higher over 700 you can go, the better. The sweet spot? “If you can get up to 740, 750, you’re going to get most loans that you apply for,” Schulz said.
The Wrap Up
Moderation in all things. Keeping that in mind will fix most objections people have to credit. A sound budget will set you up for financial success and help your debt management skills more than you could imagine. Make your payments on time, try not to spend too much, and keep your credit score growing to take advantage of those long-term savings. As always, you know we want to see you win, and you should know you deserve it!
Writer, rhymer, gamer: the easiest way to define the man known as Kenneth Medford. I’m a simple man who loves to learn and loves to help and I wander the digital world trying to find ways to sate my hunger for both. Basically, I’m Galactus but helpful.
Check out my other work here or reach out to me on LinkedIn.
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