Amid intimidating headlines about rising interest rates and a potential recession, Americans are looking for ways to save money. Aside from cutting coupons and skipping takeout, one way consumers can save money is by improving their credit score.
In fact, the latest LendingTree study shows that raising your credit score from fair (580 to 669) to very good (740 to 799) could save you almost $50,000. To put that into perspective, median earnings for Americans in 2020 were $36,280, according to the U.S. Census Bureau.
Researchers utilized anonymized loan request and average loan balance data from LendingTree users to conservatively measure the difference over the lifetime of loans across these two credit bands for credit cards, personal loans, auto loans and mortgages.
Key findings
- Raising your credit score from fair to very good could save you nearly $50,000. Borrowers with four common debt types — credit cards, personal loans, auto loans and mortgages — could save $49,472 over the lifetime of the loans by improving their credit from fair (580 to 669) to very good (740 to 799).
- This breaks down to a monthly savings of just over $250, which is especially important amid rampant inflation. Total average monthly payments would be $3,029 with fair credit or $2,777 with very good credit — a difference of $252.
- Improving your credit score has the largest impact on your mortgage costs. A boost from fair credit to very good could lead to $40,041 in mortgage savings, accounting for 81% of the nearly $50,000.
- Finding your best offer can make a big difference, as the gap between the lowest and highest APRs offered to the same consumers can be significant. Consumers with very good credit could save $12,654 on personal loans, $36,498 on auto loans and $377,766 on mortgages if they get the lowest APRs instead of the highest.
Building your credit score could save you nearly $50,000
This LendingTree analysis found that raising your credit score from fair (580 to 669) to very good (740 to 799) could save you a whopping $49,472.
No, raising your credit score doesn’t entitle you to a lump sum of money. This study assumes borrowers have a credit card, personal loan, auto loan and mortgage with an average loan amount and annual percentage rate (APR) based on the debt type. The nearly $50,000 figure shows the total cost difference for a borrower with a fair credit score and one with a very good score.
Here’s a high-level look at how much money fair-credit borrowers could save depending on their type of loan if they were to raise their credit score to very good:
- Credit card: $3,747
- Personal loan: $3,171
- Auto loan: $2,513
- Mortgage: $40,041
The largest area of savings — by far — was mortgages, with $40,041 making up 81% of the previously stated $49,472.
“There’s very little in life that is more expensive than having crummy credit,” says Matt Schulz, LendingTree chief credit analyst. “A low credit score could cost you thousands — or tens of thousands — of dollars over your lifetime in the form of higher interest rates and fees, and it could even keep you from getting that loan altogether.”
This is because your credit score demonstrates to lenders how likely you are to repay the money. The better your credit, the more likely you are to get approved for a loan and the better terms that loan will likely have.
“If your credit score is low, banks aren’t going to trust you to pay them back,” Schulz says. “If they choose to lend to you, they may charge you a really high interest rate or extra fees to protect themselves and minimize their own risk.”
We found that average monthly payments for these loan types would equal $3,029 for those with fair credit and $2,777 for those with very good credit. This means that good-credit borrowers could save $252 a month, which is nothing to turn your nose at, given concerns over soaring inflation.
“It’s much more expensive to borrow today than it was six months ago, and it’s likely to only get more expensive in the near future,” Schulz says. “The Federal Reserve has shown no signs that it’s going to stop raising rates anytime soon in its battle with inflation.”
| Money saved by raising your credit score from fair to very good | |||||
| Fair credit (580 to 669) | |||||
| Debt type | Average loan amount | Loan term | APR | Monthly payment | Total payments |
| Credit card | $6,569 | Variable | 24.45% | $71 | $18,690 |
| Personal loan | $11,980 | 3 years | 29.87% | $508 | $18,277 |
| Auto loan | $28,212 | 5 years | 9.26% | $589 | $35,352 |
| Mortgage | $314,391 | 30 years | 5.88% | $1,861 | $669,938 |
| Total | $361,152 | $742,257 | |||
| Very good credit (740 to 799) | |||||
| Debt type | Average loan amount | Loan term | APR | Monthly payment | Total payments |
| Credit card | $6,569 | Variable | 17.19% | $60 | $14,943 |
| Personal loan | $11,980 | 3 years | 15.74% | $420 | $15,106 |
| Auto loan | $28,212 | 5 years | 6.14% | $547 | $32,839 |
| Mortgage | $314,391 | 30 years | 5.32% | $1,750 | $629,897 |
| Total | $361,152 | $692,785 | |||
| Source: Analysis of second-quarter 2022 anonymized LendingTree consumer loan offers data. | |||||
| Total average monthly payments | |
| Fair | $3,029 |
| Very good | $2,777 |
| Difference | $252 |
| Source: Analysis of second-quarter 2022 anonymized LendingTree consumer loan offers data. | |
Comparing loan offers could save consumers tens or hundreds of thousands of dollars
This brings us to our next point: how to save money on a loan, whether it’s for a new vehicle or a home improvement project. The disparity between the lowest and highest APRs offered to consumers can be significant.
For instance, we found that consumers with very good credit could save quite a bit if they take the lowest APRs offered.
How much? Here’s how much borrowers could save based on the type of loan they take out:
- Personal loan: $12,654
- Auto loan: $36,498
- Mortgage: $377,766
| Cost difference in average lowest and highest APRs | |||
| Very good credit (740 to 799) | |||
| Personal loan | Auto loan | Mortgage | |
| Average loan amount | $11,980 | $28,212 | $314,391 |
| Average lowest APR offered | 11.01% | 4.10% | 4.72% |
| Average highest APR offered | 21.64% | 7.69% | 5.98% |
| Difference (basis points) | 10.64 | 3.59 | 1.26 |
| Difference (cost over life of loan) | $12,654 | $36,498 | $377,766 |
| Source: Analysis of second-quarter 2022 anonymized LendingTree consumer loan offers data. | |||
“Shopping around is vital,” Schulz says. “While offers will certainly vary depending on your credit score, they also frequently vary based on the lender.”
One strategy to use when shopping around is to use offers you’ve gotten from other lenders to frame your negotiation, Schulz says.
“If you’ve seen offers at other websites, in your snail mail or at your local bank branch, share them with other lenders and see if they’ll work with you,” Schulz says. “There’s no guarantee that you’ll get your way. But if you don’t ask, the answer is always no.”
4 methods to raise your credit score from fair to very good
A low credit score can make it challenging to qualify for low interest rates and be exponentially more expensive than if you had good credit.
There are steps you can take to increase your credit score, improve your odds of getting approved for credit opportunities and potentially save money. Here’s a closer look:
- Check your credit report for errors: A simple way to boost your credit score is to check your credit report for errors. About 1 in 5 consumers find mistakes on their credit reports, and disputing those errors can get them removed. Once those errors are removed, your credit score may see a boost.
- Make on-time payments: Your payment history makes up 35% of your FICO Score. In fact, if you miss a payment, your credit score could drop anywhere from 90 to 110 points. On top of that, you may have to pay late fees to your lender. To avoid this, staying on top of your payment due dates is wise. And if you don’t think you’ll be able to make a payment, talk to your lender to see if it would be willing to offer you some flexibility.
- Consider a debt consolidation loan: Missing payments on your bills could cause your credit score to plummet. To keep up with your payments, Schulz suggests looking into debt consolidation loans. They can not only make it easier to manage your various bills, but they may also save you money if you qualify for lower interest rates.
- Use the debt avalanche or snowball method: The lower your credit utilization ratio, the higher your credit score could be. Schulz encourages borrowers to use the debt avalanche or debt snowball method to aggressively pay down debt and improve their credit utilization ratio. While the debt avalanche method prioritizes paying down debts with the highest interest rates, the debt snowball method guides borrowers to pay off the smallest debts first. Schulz prefers the debt avalanche method to save money in the long run.
If you find yourself in a situation where your credit score has significantly improved since a loan or credit card offer was made, you can still find ways to save.
“You don’t have to settle for paying the same rates that you were stuck with when your credit wasn’t as great,” Schulz says. “Consolidating and refinancing higher-interest debt with a 0% balance transfer credit card or a low-interest personal loan can be a great place to start.”
Another way to save money if you have credit cards is to ask your creditor for a lower rate. According to an April 2022 LendingTree study, 70% of people who asked their credit card company for a lower rate received one, Schulz says, but far too few people ask.
“The better your credit, the more likely you probably are to get your way,” Schulz says. “However, if you have good news to share with your card issuer about a real improvement in your credit score, you should tell them and ask if they’d consider lowering your interest rate.”
Methodology
Average balances and APRs for personal loans, auto loans and mortgages were calculated from offers on the LendingTree platform in the second quarter of 2022, aggregated by credit score band with a focus on fair (580 to 669) and very good (740 to 799). We assumed 30-year mortgage terms, 60-month auto loan terms and 36-month personal loan terms.
The average credit card balance was calculated using more than 1 million anonymized LendingTree users’ credit reports from January 2021 through February 2021. We assumed credit card borrowers paid the monthly minimum on the existing debt. Credit card APRs were based on a July 2022 LendingTree analysis of about 200 credit cards from more than 50 issuers.
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This article originally appeared on LendingTree.com and was syndicated by MediaFeed.org.
5 key differences between credit scores & credit reports
Credit scores have become synonymous with credit reports over the years, but there are some key differences you should know about. For one thing, you might be surprised to find upon reviewing your free credit reports that you won’t see your credit scores on them. Here’s more of what you need to know about the differences between credit scores and credit reports.
Depositphotos
The first thing you should understand about the differences between credit reports and credit scores is that they are two different products
Credit reports are generated by credit reporting agencies, also known as credit reporting bureaus or credit reporting companies. There are three credit reporting agencies: Equifax, Experian, and TransUnion.
Credit scores, on the other hand, are created by credit scoring companies. The two main credit scoring companies are FICO® and VantageScore®.
The lines between the two different types of companies are blurring, though, as they can partner together. (For example, Equifax, Experian, and TransUnion® all worked together to develop VantageScore®, even though it’s an independently run company. The companies also can create their own independent credit scores.) But more on that later.
In the meantime, what you need to know is that credit scores and credit reports are not the same, and you shouldn’t expect to see one of your credit scores when you obtain one of your free credit reports.
DepositPhotos.com
You can probably already surmise that you don’t just have one credit report and you don’t have just one credit score. The very fact that there is more than one company for each should make that clear. However, you might be surprised to know just how many of each you have.
Credit reports are simple to number. There are three major credit reporting agencies — therefore everyone has three credit reports. There are also companies that track your banking behavior and create reports on those, but those reports are not the same as your credit reports.
Tracking the number of credit scores you might have, on the other hand, is a bit more complicated. Although there are two major credit scoring companies, each one has multiple models of their scores. For example, FICO® has specific credit scores for auto loans as well as specific credit scores for mortgages and other types of credit.
What’s more, as FICO® and VantageScore® update their models, lenders using them don’t always update things on their end. Thus, several models of the same credit score can be in rotation at the same time, making it that much harder to know what score a specific lender might see when running your application for credit.
The main takeaway to understand here is that everyone has multiple credit reports and multiple credit scores, so seeing one doesn’t mean you’ve seen them all. The good news is, credit scores are put into ranges, so if you focus on the range instead of the number, you can have a fairly good idea of the current state of your credit.
DepositPhotos.com
There’s a number of ways to see your credit reports, but when you obtain your free annual credit reports from AnnualCreditReport.com, you won’t see your credit scores on them.
However, some services enable you to see one of your credit scores for free, and from which you can also review items that are on one of your credit reports. For example, if you sign up for Upturn, you can see both your VantageScore 3.0 from TransUnion® and individual cards showing each item that’s on your TransUnion® credit report.
You can also pay to see both a version of your credit score and a version of your credit report at the same time. FICO®, Equifax, Experian, and TransUnion® all have products that you can pay for to view one of your credit scores as well as items from one or more of your credit reports (along with other services, such as alerts to changes on the scores and reports they’re showing you).
Anchiy
Credit scores and credit reports may be two different products, but that doesn’t mean they don’t relate to one another. In fact, the information on your credit reports will help to determine your credit scores.
When you pull up your credit reports, you’ll see specific information on each financial account you hold. That information includes your balances, your payment history, the length of time you’ve had those accounts, and so on. All of these heavily influence your credit scores.
The information above can be derived from your credit reports, which is why it’s so important to review them and ensure their accuracy regularly.
Johnny Greig/istockphoto
So, what can you do if your credit reports aren’t accurate? You can dispute them. Unfortunately, you can’t dispute your credit scores — but getting your credit reports corrected will affect change on your credit scores. Remember, they’re different products, but the information on your credit reports will be used to determine your credit scores.
If you see a mistake on your credit reports, you can dispute the mistake through the credit reporting agency showing that mistake. You can also use free tools from different companies (including Upturn, which helps you find and dispute mistakes on your TransUnion® credit report).
Once the dispute is resolved and a change is made to the credit report in question, then your credit scores should reflect that change, though not necessarily right away.
This article originally appeared on UpturnCredit.com and was syndicated by MediaFeed.org.
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Featured Image Credit: Khosrork / istockphoto.
