Credit Series: Why Credit Matters

We’ve talked a lot about how credit scores are calculated as well as ways to improve your score, so today I wanted to take a look at how your score actually affects you.
Your credit score has a large impact on the amount of interest you pay on a loan. Using FICO’s Loan Saving Calculator, I am going to illustrate the amount of money you can save by having a high credit score.
Assuming a $30,000 36-month new auto loan, we look at the interest rate, the monthly payment, and the total amount of interest paid based on credit scores. I think you will be surprised at just how much bad credit can cost you and the difference it could make in your life.

This is the seventh part of my Credit Series, where I explain the most important aspects of credit, credit reports, and credit scores. Each installment focuses on one factor influencing credit, tools to monitor and improve credit, or an explanation of a specific credit concept.

We’ve talked a lot about how credit scores are calculated as well as ways to improve your score, so today I wanted to take a look at how your score actually affects you.

Your credit score has a large impact on the amount of interest you pay on a loan. Using FICO’s Loan Saving Calculator, I am going to illustrate the amount of money you can save by having a high credit score.

Assuming a $30,000 36-month new auto loan, we look at the interest rate, the monthly payment, and the total amount of interest paid based on credit scores. I think you will be surprised at just how much bad credit can cost you and the difference it could make in your life.

Car Loan Chart

As you can see from the chart, those with the highest credit scores have an interest rate of just over 5.8%, giving them a monthly payment of $910. However, as the credit score decreases, the interest rate, along with the monthly payment increases. In the 660-689 tier, the monthly payments increase by $50 a month and the total amount of interest increases by almost $2,000 over the three year term of the loan. If you have an extremely low credit score, in the 500-589 range, this could mean almost $200 a month more in payments as well as over 3 times as much interest paid. Nobody would want to pay an extra $2,000 per year in extra interest charges due to poor credit. Imagine paying almost $40,000 for a $30,000 car. That’s what someone with a poor credit score would be dealing with.

The differences in cost are even more drastic when looking at mortgages. For a $300,000 30-Year fixed loan, the monthly payments for someone with a 630 credit score are $300 higher than for someone with a 760 credit score, which would add over $100,000 to the cost of the loan.

Clearly credit scores can have a huge effect on the amount houses and cars actually cost us, and by keeping our credit score high, we can save thousands of dollars a year.

One Response to Credit Series: Why Credit Matters

  1. Liz says:

    The actual reason why I am striving hard to maintain a good credit is the fact that credit score are the most important requirement that a loan borrower should have. If you have a good credit it would be much easier for you to get the loan that you need but if you have a bad credit you might not be able to see lenders that will offer you a loan, if there’s any there are some other conditions to consider and one of that condition is the interest rate matter.

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