Add 50 points to your credit score and good things will happen. That sounds great, but what does a higher credit score really do for you in dollars and cents?
The answer, it turns out, is a bunch.
Using myFICO.com’s calculator, you can see how your wallet benefits when you improve credit score components like payment history, mix of credit, and credit use. If you need $175,000 to finance or refinance home at today’s best rate – 3.4% in this example – here’s how the combination of credit and costs works out with a 30-year fixed-rate loan.
How much money can you save?
The table below shows how differences in credit score affect home loans, auto loans and unsecured financing. You’ll see that unsecured loans react much more strongly to changes in credit grade. that’s because your promise to repay is the only guarantee the lender has — and your promise is worth more when your credit is good.
To see your potential savings, find the interest rate associated with your credit score. Then the one with a score 50 points higher. Using a calculator, you can see the difference in payments for your loan amount. That’s how improving your credit translates into actual savings in your world.
Here’s a sample, showing how credit score affect a $200,000 mortgage as of this writing:
And here’ s how it impacts your auto payment (5 year loan shown):
Personal loans and credit cards, being unsecured, improve even more when you improve credit score factors. Here is the breakdown of interest rates and credit grades from one national lender (5 year term):
So the difference in costs for various types of financing is significant. If you had a $200,000 mortgage, a $20,000 auto loan and a $10,000 personal loan, you could save by moving out of from 630 to 680. That’s $922 for the personal loan ($1,369-$447), $1,083 for the auto loan ($1,487 -$404), and $1,687 on the mortgage ($2225-$538). That’s $3,692 in free money!
The credit score depths
There are credit scores lower than 600. And, really, you can get a mortgage, auto loan or personal loan with a credit score as low as 500. The catch is that the rate and fees will be higher, and you have fewer choices.
The real costs
If you look at the numbers above they show how costs increase on a monthly and annual basis. Alternatively, if you look at the numbers you can also see that improving your credit score can lead to big monthly savings.
Keep in mind that these are just annual savings. Over the full 30 years of a mortgage, your savings can easily get into five figures or more. During the five-year terms of the personal loan and auto loan shown above, you could save about $10,000 just by adding 50 points to your credit score.
Add 50 points to your credit score
There is real money to be made with higher credit scores. And the money you save is not taxable – it’s a “savings” and not income. There are several steps you can take to raise your credit score.
First, check your credit report for errors and items that are out-of-date. They can result in lower credit scores, in a few cases more than 100 points lower according to the Federal Trade Commission. For a free copy of your credit report go to AnnualCreditReport.com.
Consider signing up for credit score enhancement programs such as Experian Boost and FICO’s UltraFICO. With these programs you allow your bank accounts to be accessed by credit reporting services so they can track your spending practices. It is believed that such programs can raise credit scores for tens of millions of consumers.
Fix most common score problems
There are three common problems that drag consumer credit scores down: using too much available credit, a limited credit history, and a bad repayment history.
If your problem is overspending, set up a budget. This will show how much you spend — and where you can save. Direct these savings toward reducing your credit usage. Credit utilization (how much credit you’re using) makes up 30% of your FICO score. Your goal should be to use no more than 30% of your available credit.
If your problem is a limited credit history, you can improve your score quickly. Ask a relative or friend with excellent credit to add you as an authorized user on an account or two. You won’t actually use the account. It’s probably better if you don’t even know the account number. But every month, the account holder’s good repayment history will appear on your credit report and improve your score.
If your repayment history is bad, sign up for automatic bill paying with your bank so you don’t miss payments. If you are behind on payments and unable to catch up, ask your creditors to re-age your account. That means adding your past due amounts to your balance and resetting your status to current. You have a better chance of success if you can offer a payment when you ask. or have a reputable credit counselor contact your creditor for you.
Finally, it’s okay to spend less, to have less stuff, and to live in a smaller house. People across the country are downsizing. Using credit cards less — and paying bills on time and in full — is one sure way to raise credit scores.