Forgetting about your credit score until you actually need to take out a loan can be a big mistake. It takes time to fix and improve your credit, so it should be on your mind even if you don’t plan to use it until further down the line.
Of course, having a good credit score isn’t the real benefit, it’s the money you can save with a higher score. Here are some important comparisons for how much a good credit score is worth compared to a bad one.
The home mortgage is the mother of all loans. While you may be able to refinance later, you’ll theoretically be locking in a loan that will last 15-30 years into the future. Because of this, even seemingly-small changes in interest can make a big difference.
Using rates from myFICO’s loan savings calculator, here’s a comparison of offers for good and bad credit scores for a $200,000, 30-year mortgage.
Good FICO score (760-850):
Interest rate: 2.926% APR
Monthly payment: $835
Total interest paid: $100,689
Fair/Bad FICO score (620-639):
Interest rate: 4.515% APR
Monthly payment: $1,015
Total interest paid: $165,455
The difference: With the better credit score, you’ll save almost $65,000 in interest. Not a bad chunk of change considering the mortgage principal is only about three times this amount. Note that if your score is lower than 620, you may not be eligible for a mortgage at all.
Even if $65,000 doesn’t sound like a fortune, it can become one if you’re able to invest this money and let it grow over the 30-year period of the mortgage or even longer.
Credit card offers vary, but many of the best cards are available to only those with the best scores. A bad score can mean limited options or paying to use a secured credit card.
Good FICO score (about 700 and up): Access to almost all credit cards out there, including ones that offer major benefits.
“A good credit score will actually make you money, because with it you can apply for a card that offers a $500 sign-up bonus or two free flights,” said Michael Dolen of CreditCardForum.com.
“A good credit score is a must have if you want to get a good rewards program,” Dolen said. “If you look at the issuer’s official marketing language for the best cash back and travel reward cards, they all list ‘excellent credit’ as a requirement. And that’s not a bluff; it’s really what you need to get approved in today’s economy.”
Fair/Bad FICO score (about 700 and lower): Rewards cards typically not available. A plain credit card is the best case, but you may need to start with a secured credit card where you’ll pay an annual fee and have to deposit money to secure the card, too.
The difference: Having access to the best credit cards can have major benefits. Anything less than “excellent” credit means you may be blocked off from the best cards.
“Having ‘fair credit’ and ‘bad credit’ are almost synonymous nowadays. Five or six years ago, a ‘fair’ credit score was all it took to get approved for a great card. Now, fair credit won’t qualify you for much other than entry level plain vanilla credit cards,” Dolan said.
For bad credit, Dolan said you may even be stuck with a secured credit card that charges an annual fee. He points to the CapitalOne Secured MasterCard that costs $29 a year to use. Although the fee is small, you’re losing rather than gaining compared to a rewards card.
Financing a car is only a fraction of the cost compared to that of a house. But don’t be fooled: the interest savings can be huge between a good and bad credit score.
Here’s a comparison for a $25,000, 60-month auto loan for a new car using myFICO’s loan calculator once again.
Good FICO score (720-850):
Interest rate: 3.54% APR
Monthly payment: $455
Total interest paid: $2,314
Bad FICO score (500-589):
Interest rate: 17.208% APR
Monthly payment: $624
Total interest paid: $12,447
The difference: Even on just a five-year loan, that’s $10,133 less in interest for the good credit score compared to the bad score for about an 81% savings.
Landlord, insurers, and more
Even if you’re not looking for a loan, your credit score still matters. Some other cases include:
- Landlords. Some landlords may turn you down if you have bad credit, potentially limiting your options for where you can live and the monthly rent you pay. Bad credit could also mean leaving a larger security deposit or finding someone to co-sign on your lease.
- Cell phone carriers. Did you know you could get turned down for a cell phone due to bad credit? You can, and many carriers check to see your history of paying bills on time. Bad credit means you could lose out on the best plan rates, that you’ll have to leave a deposit, or that you’ll be turned down altogether.
- Insurers. Both home and auto insurers may look at your credit score before offering you a policy and determining premiums.
- Employers. Potential employers might check your credit score as a measure of reliability for if you’re hired. It’s possible a bad score might just eliminate you from eligibility at your top job pick.