About the Author
Aileth is on the Operations Team with RentReporters. She has been a part of the community since 2018.
If you’ve poked around our site, you’ve probably known that our customers experience an average increase of 40 points in 10 days after reporting their rent payments. 40 points? One might say 40 points seems insignificant. Actually, it’s quite the opposite. 40 points can take you from what’s considered a poor credit score (580 or lower) up to a fair (620 and above) credit score and this difference in range opens up an array of benefits to the consumer.
These 40 points could potentially put more than a year’s salary back into your pocket.
Here are the advantages that we, as consumers, may experience as we work to improve our credit scores.
If you’re in the market for a new car, you’ll probably need a car loan. According to data presented by Experian, if your credit score is considered to be poor, you’ll likely shell out an average of 15.7% in just interest fees alone!
Let’s say you have a car loan in the amount of $10,000 for a duration of 6 years. A poor credit score can add significant and unnecessary weight to the total amount owed. This $10,000 car loan could actually cost you over $15,000 once you’ve finished paying off the loan, with $215 dollars in just interest added per month. That’s $5,500 in interest paid due to having a low credit score!
If that car were to cost $20,000 and you’re able to boost your score by 40 points, bumping it from 580 to 620, your interest rate could drop to about 8.6%, which works out to a total of just under $12,000 in added interest fees. Therefore, with a 40 point increase, you could be saving over $3,000 over the life of the loan.
The starting average interest rate for credit cards, if you have poor credit, is 21%. Keep in mind that 21% is just the starting rate and it is common to see interest rates push past 30%.
To demonstrate we’ll use the 21% interest rate on a credit card debt of $5,000. Most credit card companies charge 1% plus whatever the interest is for your minimum payment due. In this case, the minimum payment due would be $137 every month. If you only make the minimum payment on your $5,000 credit card debt, it will cost you a total of $8,124, and that can take years to pay that off.
If you can manage to increase your credit score by 40 points, your interest rate could drop 2 percentage points, down to 19%. A 2% decrease doesn’t sound like all that much, but your total payment could fall from $8,124 to $7,322, saving you $800 in interest payments. If you really go the extra mile and can raise your credit score to over 720, your interest rate could drop down to 14% which means your $5,000 credit card debt could drop from $8,124 -on a 21% interest rate- to around $5,333. That’s $3,000 in savings!
Be sure to check your credit card’s interest rate if you haven’t already. You’ll be surprised by how much interest fees may be costing you. Remember, your interest rates can decrease depending on how well you manage your credit!
Here’s where your credit score weighs in the most. While you may be approved for a mortgage with a lower credit score, most lenders want to see a credit score of 620 or higher if they are going to be establishing an account with you.
The average mortgage nationwide is $300,000 and most mortgages are paid back on a 30 year plan. According to myFICO, the average interest rate for a 620 credit score is 4.2%. Using our calculator and not factoring in any additional costs or down payments, a $300,000 mortgage at 4.2% interest rate works out to $1,467 per month, and will cost you $228,000 in interest over the life of the loan, for a total of $528,000 spent on your house.
But if you boost your score by just 40 points, your interest rate drops nearly a full percentage point. Again, that may not sound like much, but that same loan for the same house now only costs you $1,297 per month, meaning you’re saving $170 per month. That’s a lot of money that can be used elsewhere! Over the life of the loan, you’ll spend $167,064 in interest, for a total of $467,064, meaning you save $61,000 in interest. Now do you understand the difference 40 points can achieve?
In summary, boosting your score 40 points and moving from poor credit to fair credit could save you about $3,000 on a $10,000 car loan, $800 on a $5,000 credit card balance, and $61,000 on a mortgage. That’s over $65,000 in total savings! If we break it down by month, it works out to putting about $225 back into your pocket. We know these are a lot of numbers and calculations to absorb, but trust us; the better your credit score, the more money you will save.
So, if there was a service that could boost your credit score by 40 points in just 10 days for only $9.95 per month and it could put $225 back into your wallet every month, that would be a pretty good deal wouldn’t it?