Your credit score is one of the primary items that lenders check when they consider loaning you money. A lower score means greater risk, and lenders will charge you a higher interest rate because of that difference – but how much could it cost you over the lifetime of a loan?
According to a new study from LendingTree, if you have only fair credit instead of very good credit, the difference can cost you over $45,000.
LendingTree analyzed loan data from their database to assess the costs of a lower credit score as applied to five different sources of borrowing (credit card debt, personal loans, auto loans, student loans, and mortgages). Interest was calculated based on the average loan amount for each type of credit. Combined, the loans totaled $310,263 – dominated by the average mortgage loan of $234,437.
At interest rates available with very good credit (740-799), the total interest payment over the lifetime of all five credit sources was $212,498. At the higher interest rates applied to a borrower with a fair credit score (580-669), the total shifts to $257,781 – a difference of $45,283.
As expected, the largest difference is in mortgage costs. The difference between fair credit and very good credit in the study costs an average homeowner $29,106. Credit card debt makes the second most impact, with approximately $5,600 in extra costs (assuming you make minimum payments on the average balance).
While they contribute lesser amounts, personal loans and auto loans have the greatest percentage difference in interest costs. Fair credit with an average $11,258 loan costs $6,007 in interest, while borrowers with very good credit only pay $2,217 – a 271% penalty for poorer credit. Similarly, the average auto loan of $21,778 costs $2,267 in interest with very good credit but $7,050 with fair credit – a 311% increase.
How can you raise your credit score and save money on interest? Start by checking your credit report for any errors or signs of fraud/identity theft that may be dragging your score down. You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips.
Assuming that you've earned that low credit score, consider the primary components used to calculate a credit score. See how your factors compare.
The largest factor in your credit score is payment history. On-time payments are critical to keeping your score high. Always make at least the minimum monthly payment on all loans.
Next, check your credit utilization – the amount of your available credit that you're using. It's best to keep the ratio below 30%. People with the best credit scores tend to use 6% or less of their available credit and carry revolving (credit card) balances below $3,000.
Are your accounts relatively new? Older, well-maintained accounts show greater stability and lower risk. Build up your credit by making periodic small charges and paying them in full on time every month.
Opening new credit accounts or making multiple requests for credit can drop your score. Lenders may assume you're at risk of taking out more credit than you can afford. Open new credit accounts sparingly and don't take out multiple credit requests unless they are obviously related to the same purchase (like shopping for mortgage interest rates).
Finally, creditors like to see that you can handle different types of credit responsibly – for example, a mortgage, revolving credit card debt, and a separate installment loan.
Review your credit report today and compose a plan to raise your credit score. Even if you have very good credit, there's always room for improvement. Why pay more interest than you have to for any loan?
If you want to reduce your interest payments and lower your debt, try the free Debt Optimizer by MoneyTips.