Raising a ‘Fair’ Credit Score to ‘Very Good’ Could Save Over $56,000
Online loan marketplace LendingTree has released a study on the financial impact of raising a ‘fair’ credit score to ‘very good’ that found consumers could save over $56,000 across the lifetime of common interest-carrying debt types.
On a monthly basis, that translates to an average total difference of $316 per month.
LendingTree researchers analyzed anonymized loan request and average loan balance data from LendingTree users to see how a lower credit score can increase borrowing costs for the average American with a fair versus excellent credit score.
The analysts compared the range of credit scores generally considered “fair” (580 to 669) to the range generally considered “very good” (740 to 799) to measure the difference in costs of the life of loans using the average balances for five different kinds of loans (mortgage, student loan, auto loan, personal loan and credit card).
- Raising a credit score from fair (580-669) to very good (740-799) saves $56,400 across five common loan types. That’s an average total difference of $316 a month.
- Mortgage costs account for 73% of those savings ($41,416 in savings with “very good” credit versus “fair”).
- Refinancing student loans comes with the second biggest savings difference at $4,707, or 8% of the total difference in interest.
- Borrowers with fair credit can expect to pay more than twice as much in interest for personal, auto and student loans, and 97% more on credit cards.
Total Interest Paid over Lifetime of Loans
The study analyzed borrowing costs across the 5 most common debt types, using average amounts for each outstanding debt. Assuming a borrower repays all five debts on time, their total costs for interest and fees will amount to $233,209 (for very good credit) or $289,609 (for fair credit).
That’s a difference of $56,400 in interest and fees. (To put that into perspective, the median earnings for Americans in 2018 was $35,291, according to the U.S. Census Bureau.)
Even Americans who don’t carry all five of these debt types can save significantly with very good versus fair credit.
Assuming every other factor is equal, someone with a very good credit score would have a monthly mortgage bill that is $115 lower than someone with a fair credit score.
They could invest that money, use it to pay down other debts or save for future down payments.
Raising your credit score isn’t as hard as it sounds
The idea of managing your credit score can be intimidating and might seem like a lot of effort. The good news is that it’s not as complicated or opaque as many people fear.
Changes to your credit score can happen quickly, with some consumers seeing positive changes in a relatively short period of time for things like paying down credit debt or disputing any errors on credit reports.
Those who plan to take out a mortgage or other loan type should refrain from opening new credit accounts, as credit checks and young accounts can lower your credit rating.
And for those in good standing with card issuers, it may make sense to ask for a higher credit limit, thereby lowering your overall utilization ratio (not increasing your buying power).
Credit monitoring can be an essential key to the process because it helps you identify what may be affecting your credit score and how ongoing decisions can change it.
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