5 Reasons Why Good Credit Will Save You Money
You’ve probably heard that it’s important to have a good credit score. You may even know that people with higher credit scores can qualify more easily for personal loans and other financial products, and that they may get lower interest rates. A couple of percentage points here or there may not seem like a big deal until you start looking at the numbers.
LendingTree did a survey comparing the costs over the life of various types of loans for those with “fair” credit (a FICO Score of 580-669) to those with “very good” credit (740-799). Based on average loan amounts, those with very good credit saved more than $45,000 over the life of all their loans.
How good credit can save you money
Your credit score and credit history affect more than you might realize. Some of the ways having good credit can save you money include:
1. Lower interest rates
FICO offers a handy chart that puts this into perspective. It shows interest rates broken down by credit score for several types of loans. For example, as of this writing, a 48-month loan for a new automobile has an average interest rate of 4.529% for those with FICO Scores of 720 and above. Those in the bottom tier of credit scores (500-589) have an average interest rate of 17.044%. For a $15,000 car loan, someone with a low credit score will pay more than $4,000 more over the life of the loan. And that’s just on a car loan. Once you take into account your mortgage, credit cards and other forms of credit, the savings you earn from having good credit really add up.
2. Lower car insurance costs
“Insurance companies pull your credit when determining your rates because they’ve found a relationship between poor credit and claims filing,” said Mike Sullivan, director of education with Take Charge America in Phoenix. Typically, they look at your credit history rather than your credit score, but they can use the information to increase your rates or even deny coverage, according to the Consumer Financial Protection Bureau (CFPB). Some states have restrictions on this practice, though. The CFPB recommends contacting your state attorney general’s office if you have concerns.
3. More employment opportunities
Some employers do credit checks as part of their screening process. You have to give written permission for them to do this, and if they decide not to hire you based on what they find, they are required to give you a written notice with the credit reporting agency’s information. Even if you’re already employed, poor credit may hinder your opportunities for advancement. “In the federal government, if you require a security clearance, part of that is checking your credit, and if your credit is not reasonable, you may not be given the security clearance,” said Sullivan.
4. Better business credit
One-third of Americans thought about starting a business in the past year, according to a LendingTree survey. Your personal credit plays a role in whether you can obtain business credit, though. Small business lenders look at your credit history, including bankruptcies and delinquencies, to determine whether you can be approved for business credit. Your ability to get merchant services, which is how your business would accept credit or debit cards, could be affected as well. “A lot of that underwriting [for merchant services] is based on your personal credit history,” said Nathan Danus, director of housing and community development at DebtHelper in West Palm Beach, Fla. A good credit history can help you get the business funding you need at a reasonable interest rate.
5. Better emergency options
Emergencies happen, and sometimes we need extra cash in a hurry. If you have good credit, you can get a personal loan relatively easily. If you don’t have good credit, you may need to turn to other options such as payday loans and auto title lenders. “Now you’re paying 300% APR on the loan, and the cost is so high that you can’t afford anything else,” said Sullivan. Having good credit can ensure that you have options if you need cash quickly.
Need to boost your credit score?
Fortunately, you can take steps to improve your credit score. Some practices that will give your score a boost include:
- Knowing your credit score and credit history. To know the best steps to take, familiarize yourself with your credit score and your credit reports. You can obtain your credit score through free services such as MyLendingTree, and you can obtain a free credit report from each of the three major credit bureaus once per year by visiting AnnualCreditReport.com.
- Make on-time payments. Your payment history makes up 35% of your FICO Score, so making on-time payments (or getting caught up if you’re behind) can make a big difference.
- Keep your credit card balances low. Your current credit card balances affect 30% of your FICO Score. Keep your balances as low as possible (ideally under 30% of your credit card limit).
- Be strategic about opening new accounts. New credit is also a factor in your credit score (10%). Opening several new accounts can represent greater risk and lower the age of your credit. Additionally, each time you apply for credit, it adds an inquiry to your report, which has a small but negative impact on your credit score, according to the CFPB.
- Don’t close unused accounts. This also factors into the age of your accounts. If you have a credit card you aren’t using, store it in a safe or cut up the card if you don’t want to be tempted to use it. Keep the account open, though. It will help with the age of your credit as well as your overall credit utilization (the amount of credit you’re using across all your credit cards compared to your available credit).
Good credit can save you thousands of dollars over your lifetime, to say nothing of the opportunities it opens to you. Even if you have less-than-perfect credit, though, you still have options. Check to find out your available options through tools like LendingTree’s personal loan tool, and take steps to improve your credit report. With time and patience, you can make an impact.