Most people in this world like the thought of saving money. One survey showed that 65% of Americans had a financial goal as their New Years’ resolution. For 63% of those, their financial objective was to save money. Everyone recognizes the importance of improving finances and, hopefully, setting a little aside for a rainy day fund. The problem is that many people fight an uphill battle when it comes to their finances. They don’t know their credit score, and they don’t realize that having a fantastic credit score will help them save money in the long run. Whether that money goes into a rainy day fund or a trip to Hawaii, we can all agree that there is one place your hard-earned money shouldn’t end up – in the pocketbook of a billion-dollar bank!
To understand why having a better credit score saves you money, let’s first take a look at what a credit score is.
What’s a Credit Score?
In essence, your credit score is a rating. The most popular credit score is the FICO (Fair, Issac, And Company) score. Founded in 1956 by an engineer and a mathematician, the objective of the FICO score is to rate a prospective borrower’s creditworthiness. Naturally, this scoring method has had many tweaks and versions over the years, but the premise remains the same. The score consists of a range between 300 and 850. The lower the score, the higher the borrower’s statistical risk of default is. Conversely, the higher your FICO score is, the lower the risk of default.
Those with 800+ scores have a 1% chance of becoming delinquent for 90 days or more within a two-year window. On the other end, those people with scores at the lowest end – from 300 through 499 – have a 79% chance of being delinquent.
As you might imagine, it is statistically much safer for financial institutions to make loans to those in the 800+ group than those with lower scores!
How Do Credit Bureaus Fit In This Picture?
Large companies, called credit bureaus, track and record credit accounts and payment history to those accounts. There are three credit bureaus – Experian, Equifax, and TransUnion. Whenever you open a new account, make or miss a payment, or have a credit line adjustment, the lender makes a report of that adjustment to one or more of these credit bureaus. Today, most lenders will report these milestones to all three bureaus. Therefore, the data with one credit bureau is likely the same across all three, although it is possible to have discrepancies.
When you apply for new credit, the credit card issuer will pull your credit report (which contains all that history) from one of the credit bureaus. They’ll also request a credit score to go with it. That can be the FICO score (typically FICO8), or it can be another version. If you’re getting an auto loan, for example, then usually, the dealer will use one of the VantageScore formulas. If you’ve gone to a car dealer and saw a different score than what you saw when you pulled your credit report, that’s why!
Specialized credit scores like VantageScore have a different formulation to reflect more accurately the buyer’s chances of defaulting for this specific asset class. The risks of default on a car loan are not quite the same as on a house or a credit card! However, if you improve one score, you will likely boost all of them, so don’t be too hung up on trying to obtain a copy of all these different score types.
How Can I Save Money With My Credit Score?
Your credit score has a direct correlation with how much interest you will pay on every loan you take out. It will also affect your ability to receive the loan disbursement in the first place. For example, borrowers with credit scores below 600 might find their interest rates are obscenely high. You find yourself having to agree to 25% APR on even the simplest of loans. Obviously, at the other end of the spectrum, someone with an 800+ credit score will receive the most favorable terms around.
The interest rate for the loan has a significant impact not only on your monthly payment but also the amount of interest you will pay over its lifetime.
Consider the following example. Let’s say you receive a personal loan for $10,000. If your credit score is 600, your interest rate might be 29.95%. However, if your credit score is 800, that rate might be 5.95%. For this example, let’s assume the loan duration will be five years.
The individual with a lower credit score will wind up paying $323.23 per month. Over the lifetime of the loan, they’d pay a stunningly high $9,393.61 in interest!
On the other hand, the person with a higher credit score would only pay $193.10 per month. They have a total interest cost of $1,585.74.
These figures indicate a higher credit score saves close to $8,000 or 80% of the principal amount in interest! This trend, of course, is not limited to personal loans. Mortgages, home equity lines of credit, credit cards, and auto loans all have a similar trend. The higher your credit score is, the more money you save!
Know Your Credit Score And Save Money by Repairing It
Your credit score is what will make everything more or less expensive. Even if you don’t have credit cards or personal loans, the amount of money you save is mind-boggling. For these two big-ticket categories, consumers can save tens of thousands, if not hundreds of thousands, of dollars in interest. That’s money that’s going into your pocketbook instead of padding a billionaire bank’s bottom-line!
If your credit score is low, find a couple of ways to boost it. Bring any overdue accounts up to date, lower your debt relative to your credit limit.
More importantly, before you put an application in for a mortgage, auto loan, or credit card, check your score yourself. There are many free ways to do so. Your credit score will save you money, so check it out, boost that number, and reap the savings!