Having Good Credit Can Save You Thousands Per Year
Many people think credit scores only matter if you’re buying a house or a car. While it’s true that they’re important for those big purchases, there are a lot of other ways your credit score can impact your life. Whether you realized it or not, having a good credit score can save you a lot of money. While everyone’s financial situation is unique, here’s a look at how having a good credit score can potentially save you thousands of dollars per year.
Perhaps the biggest way a high credit score can save you money is through lower interest rates on credit cards and loans. Because banks believe people with low credit scores are more likely to miss a payment, they’ll typically charge a higher interest rate, which means you end up paying more in the long run. A good credit score will earn you a lower interest rate, making it cheaper to borrow money and allowing you to pay off debt faster. A good credit score could also qualify you for credit cards with better perks or reduced finance charges.
In theory, security deposits are refundable. However, you still have to pay them up front, which means a hit to your bank account, and there’s no guarantee you’ll get the full amount back.
Having a good credit score can help you avoid these problems altogether, particularly when it comes to utilities. Not every utility company will ask for a security deposit, but many will require one. These can sometimes run in the hundreds of dollars, which can have a significant impact on your finances. The better your credit score, the more likely it is the utility company will waive your security deposit.
Your credit score can also impact your cell phone options. Some cell phone providers won’t offer contracts to people with bad credit, instead offering only pay-as-you go plans with more expensive phones. If they do offer contracts, you’ll have to pay a security deposit, which can total as much as $800. Providers may decrease the deposit amount or drop the requirement altogether for people with good credit scores, keeping your hard-earned money in your wallet where it belongs.
Car insurance is another place where bad credit can cost you. Many car insurance companies will use your credit score to decide how much to charge you (except in California, Hawaii, and Massachusetts where they are barred by law from doing so). If you have a low credit score, you’ll likely pay a higher premium. According to The Zebra’s "The State of Auto Insurance 2018," going from a "Poor" to "Excellent" credit score could lower your payment up to 44 percent. The average American pays $1,427 for car insurance each year, so that big of a discount could equal significant savings.
Buying a house is the most expensive purchase most people will ever make. However, that house becomes a lot more expensive if you don’t have a good credit score. That’s because your credit score affects the interest rate on your mortgage. In general, the better your credit score is, the lower your interest rate will be. A lower rate is important because even a small change in the mortgage rate can make a big difference in your total cost.
Consider a house with a purchase price of $300,000. If you have a 30-year fixed mortgage rate of 4 percent, you’ll end up paying $515,609 over the life of the loan. Compare that to a rate of 4.5 percent, which will leave you paying $547,220 over that same 30-year period. Keep in mind that your down payment can change the initial amounts, which will ultimately lower your total cost. However, with a difference of nearly $32,000, it’s easy to see why having good credit could save you a lot of money when buying a house.
Student loan refinancing
Federal student loans don’t require borrowers to have a credit history, so your score won’t matter initially. However, if you decide to refinance your student loans, that’s when your credit score will come into play. Refinancing companies set their rates the same way as other loans, with better credit scores earning lower interest rates. Depending on the size of the loan, the difference between a 4.5 percent rate and a 6.5 percent rate could mean you’ll end up paying thousands of dollars more over the course of the loan.
To see what all this looks like over an entire year, here’s an example of how the bills stack up for someone with bad credit versus someone with good credit.
- $3,000 in credit card debt with 24% APR = $720 in interest
- Utility security deposit = $100
- Cell phone security deposit = $500
- Car insurance = $1,300
- Mortgage rate 4.5% = $6,592 in interest
- Total = $9,212
- $3,000 in credit card debt with 12% APR = $360 in interest
- Utility security deposit = $0
- Cell phone security deposit = $0
- Car insurance = $900
- Mortgage rate 4% = $5,749 in interest
- Total = $7,009
Improving your credit score
Now that you have a better understanding of how good credit can save you money, you may be wondering how to get that good credit score and start saving. Unfortunately, there’s no magic formula to quick credit score improvement. However, practicing these good financial habits can help repair your credit score over time:
- Never miss a payment on your loans or credit cards.
- Pay down your debt to within 30 percent of your available credit limit.
- Don’t close credit card accounts, even if you don’t use them.
- Avoid opening new credit accounts, except when absolutely necessary.
- Clean up your credit history of any errors or inaccuracies.
Because everyone’s financial situation is different, it’s impossible to say exactly how much money a good credit score can save you. However, with so many companies using credit scores to determine interest rates and other charges, it’s clear that having a good credit score can make a real difference in your bank account.
If you have questions about your credit score or want to learn more ways to save money, contact the Credit Union of Texas and one of our experienced financial professionals can help you take control of your finances.