How Your Credit Score Can Save (or Cost) You Tons Of Money

Photo: 401(K) 2013

As the world becomes more digital and cash-free, good credit is more important than ever. But do you have it?

There are a lot of things these days you simply cannot do easily without a credit card, such as renting a car. Although you can qualify for a mortgage loan with less-than-perfect credit, it is not the best financial situation. 

We always hear how important having good credit can be to your personal finances, so I decided to crunch the numbers and find out just how important it is for a variety of situations.

Credit scores
The universally accepted standard in credit scores is the FICO score. These scores range from 300-850 with the higher the score, the better. According to myFICO.com, a score of 760 or above is considered to be very good, and will generally qualify you for the best rates available-or very close.

Buying a home
We all know if your credit is bad enough, you simply can't get a mortgage. However, the quality of your score is important as well.  Let's look at three scenarios to see how a 'good' or 'bad' score will affect your wallet.

First, if a home buyer has a FICO score of 760 (considered top-tier), he or she could expect a 30-year mortgage rate of 3.9% as of this writing. A homebuyer with a good, but not great score of 690 could expect a rate of 4.29%; finally, a buyer with a score of 620 (the minimum) can expect a rate of 5.48%, and may possibly have to get an FHA loan, which carries with it additional expenses.

The difference in monthly payments between these three rates is significant. From best to worst, these hypothetical homebuyers would pay approximately $1,179, $1,235, or $1,416 on a 30-year mortgage of $250,000, depending on which of the three credit scores they currently have-a difference of almost $300 a month!

Photo: KB35

Buying a car
When buying a car, good credit is even more important. In the eyes of lenders, there are two types of assets you can buy: appreciating assets (a house) and depreciating assets (a car, boat, electronics, etc.). With an appreciating asset, a bank figures that it can at least take back the asset, sell it, and recoup its money. With a depreciating asset the lender isn't as confident that it can repossess the asset and make its money back, so credit plays a much bigger role.

Let's say you want to buy a $30,000 car. Using our three credit scores of 760, 690, and 620, the difference between loan rates is significant. On a 48-month loan, these customers can expect rates of 3.2%, 4.6%, and 10.9%, respectively. This translates to monthly payments of $667, 685, and $773. In other words, the buyer with poor credit will end up paying over $5,000 more over the life of the loan!

There's more...
There is a long list of items that become much more difficult when you have bad credit. For instance, a lot of employers do a credit check, and will refuse employment to those with lots of charge-offs and defaults. Many apartment communities will not rent to anyone with a credit score below the mid-600s, and those that will rent to low-credit tenants may ask for a hefty additional security deposit. 

Credit cards are another issue. With secured credit cards, virtually anyone can obtain a credit card if they can put up a security deposit. However, the difference is interest rates and benefits.  According to Bankrate.com, the average APR for credit cards is currently 15.38%, but rates of up to 36% are common for those with bad credit. A poor credit score will almost certainly exclude a consumer from the popular "perks" credit cards that offer rewards such as frequent flyer miles.

Make your move
Life is just easier with good credit, and hopefully this discussion has provided some perspective on just how much better it can be. A quick calculation involving our mortgage example reveals that our hypothetical homebuyer with a 620 FICO score will pay more than $85,000 in extra interest over the life of a $250,000 mortgage than a buyer with a 760. 

I don't know about you, but I can think of a million better ways to use $85,000 than just handing it over to a bank!

Put that extra cash to work
It's no secret that investors tend to be impatient with the market, but the best investment strategy is to buy shares in solid businesses and keep them for the long term. In the special free report "3 Stocks That Will Help You Retire Rich," The Motley Fool shares investment ideas and strategies that could help you build wealth for years to come. Click here to grab your free copy today.


Read/Post Comments (2) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 10, 2014, at 1:10 AM, Disgustedman wrote:

    I have never had a problem with my bad credit. I paid cash for my vehicles, which are LARGE vehicles and so I convert them to live out of. Never have a property tax bill ever AND love voting up all those tax measures and listening to the homeowners scream!!!

  • Report this Comment On March 09, 2014, at 11:18 PM, WindyCityMan wrote:

    Disgustedman,

    If you had good credit, you could have financed your vehicles at 0%, invested the money into something safe like the S&P 500, received an annual return of 4%-5%, and actually made money.

    Cash is great, but credit can be a great tool if used correctly.

    P.S. Credit influences other things like auto insurance premiums, it is also something many employers look at before hiring a job applicant.

    Life is better with good credit.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2825892, ~/Articles/ArticleHandler.aspx, 12/18/2014 10:29:48 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement