[REN #847] Homeownership: Increase Your Credit Score to Save Money

Homeownership: Increase Your Credit Score to Save Money, Real Estate News for Investors Podcast Episode #847

Having a good enough credit score to get a loan may not be good enough to save you thousands of dollars in interest. LendingTree did an analysis on the cost difference between a fair credit score and a very good credit score, and the result may surprise you.

Lending Tree analysts found that raising your score from fair to very good can save you more than $56,000 if you combine the costs for a mortgage, a student loan, an auto loan, a personal loan, and a credit card. (1) That’s a savings of $316 a month for people with a higher score.

The report was put together using anonymous data from LendingTree users that had fair to very good credit scores. A fair credit score runs from 580 to 669 while a very good credit score runs from 740 to 799. Good is obviously between those two.

Credit Score Impact on Loans

For people with a very good score and an average mortgage of about $253,000, interest will cost about $220,000 over the lifetime of the loan. For those with a fair credit score, that same loan will cost about $261,000. The difference between the two is more than $41,000. If it’s a 30-year loan, that’s about $115 a month extra on that mortgage payment.

I won’t go into detail about all the loan types, but just about everyone has or has had an auto loan so let’s take a look at those numbers. According to Lending Tree, the average loan amount is about $25,000. If a borrower with a very good credit score chooses a 5-year term, they will pay a total of $3,600 or about $60 a month on interest. The buyer with a fair credit score will pay more than double the interest or about $144 a month.

The analysis can only provide ballpark figures because everyone’s situation is so different, but the LendingTree report says, many borrowers would see bigger savings than they’d expect, if they raised their credit scores. For example, credit card interest can take a big bite out of your wallet if we run up the balance and take too long to pay it all back. Plus, lenders will offer different percentage rates or APRs to customers depending on their profiles.

LendingTree says, “The average APR for a new credit card offer is 20.6%… for folks with excellent credit, the average APR offered is about 17%. For those with crummy credit, the average is about 24%.”

Improving Your Credit Score

The big lesson from this analysis is that it may pay off to work a little harder for a higher score, especially if you’re trying to purchase a big-ticket item like a home. Using a credit monitoring service will help you identify specific issues that are affecting your score, but you don’t need a service to develop good credit boosting habits. People with good scores pay their bills on time, keep credit card balances low, and only open a new account if it’s necessary. (2)

Opening a lot of new credit cards can make you less creditworthy because lenders look at your credit limit as a potential debt. If you want to cut down on your cards, don’t close those accounts. Old accounts help boost your score, so if you don’t want to use them, LendingTree says, you should cut them up or “freeze them in a block of ice” — but leave them open.

Debt-to-Income Ratio

You may want to figure out your debt-to-income ratio, and make sure it’s low enough to satisfy your lender. LendingTree says, lenders want to see a debt-to-income ratio of 43% or less for a mortgage, and 36% or less for other kinds of debt. (3) That’s one of the biggest factors in loan approval, and it isn’t just mortgage debt that lenders are concerned about. They look closely at total debt or what they call the back-end ratio. The back-end ratio includes the mortgage plus all other debt obligations divided by your gross monthly income.

Links:

(1) LendingTree Study

(2) Raising your Credit Score: LendingTree

(3) Good Debt to Income Ratio: LendingTree

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