Many factors come into play when building wealth and improving your financial position. The amount of income you generate, saving regularly, and, most importantly, your ability to live within your means all play a crucial role.
One of the best ways to reduce expenses and alleviate financial stress is with an excellent credit score. We all need to borrow money at some point, whether it’s for a vehicle, a home, or using a credit card to manage monthly cash flow. Reducing the amount of interest that you pay on these loans is key to keeping your monthly expenses low.
Understanding Credit Scores
Your credit score represents your financial health and overall creditworthiness, meaning how responsible you are when it comes to managing money and debt. Your score is a three-digit number between 300 and 850 that provides a quick snapshot of your financial history.
Lenders use this figure to assess the risk associated with lending money to you. The lower your score, the greater the risk, which translates to higher interest rates and more costly loans. On the opposite end of the spectrum, a higher score awards you with lower interest rates and more affordable borrowing opportunities.
While most associate credit scores with borrowing money, they also play other crucial roles:
- Landlords often check your credit when you apply for an apartment or home rental lease.
- Specific industries use credit scores when hiring new employees.
- Car insurance companies typically factor in credit scores when setting policy premiums.
- Some businesses, such as utility companies, often waive deposits if you have a good score.
The Benefits of Having an Excellent Credit Score
Your credit score is one of the most important numbers of your adult life. Think of it as a key that unlocks the door to better financial opportunities. When you put in the effort to build and maintain a favorable score, you’ll reap a slew of perks, including:
- Easier Approvals
When opportunity strikes, you don’t want to miss out or be hindered by your credit score. Perhaps that perfect apartment or home is finally on the market. Or your current car is on its last legs (or wheels), and you need to buy a new one. A good credit score allows you to become approved for loans or other financial opportunities when needed.
- Reduced Stress
A fair credit score can put unnecessary financial stress on you. As a higher risk to lenders, your loan and credit card rates will likely be higher – leading to additional interest charges. Additionally, if a financial emergency pops up, it can be harder to obtain the money you need to put out the fire.
An excellent credit score alleviates this financial stress and puts you in control of your finances and opportunities to come.
- More Affordable Loans
The most significant perk of an excellent credit score is the ability to borrow money at much lower interest rates. When lenders view you as a low-risk borrower, they will award you with more favorable loan rates and terms.
See It in Action: Why Your Credit Score Matters
Credit scores are represented by a three-digit number. Lenders use this figure to approve and price loans. While each lender has their own credit score and pricing tiers, here is an example of how a lender might process car loans:
| CREDIT SCORE | INTEREST RATE (APR) |
| 800 – 850 | 5.99% |
| 720 – 799 | 6.99% |
| 670 – 719 | 8.99% |
| 600 – 669 | 11.99% |
| 300 – 599 | 14.99% |
Now imagine John and Mike are buying the same new car. The car costs $30,000, and both finance it for 60 months. John’s credit score is 815, and Mike’s is 658. Here is how their loan costs differ:
| BORROWER | CREDIT SCORE | INTEREST RATE | MONTHLY PAYMENT | TOTAL INTEREST |
| John | 815 | 5.99% APR | $579.84 | $4,790.67 |
| Mike | 658 | 11.99% APR | $667.18 | $10,030.91 |
While John and Mike buy the same car at the same terms, you can see that John’s better credit score benefits him significantly. Mike’s monthly payment is $87.34 more than John’s. But more so, Mike pays an additional $5,240.24 in interest over the life of his loan – for the same car.
Lenders price loans this way because of risk. Mike is more likely to default on his loan, which would cost the lender money. On the other hand, John is at a lower risk and is rewarded with more affordable rates because the lender’s potential for a financial loss is significantly lower.
Quick Ways to Boost Your Credit Score
Improving your credit score is easier than you might think. Often, you don’t need a significant increase to benefit.
Using the example above, Mike’s credit score was 658. The next tier begins at 670, meaning if Mike improves his score by 12 points, his interest rate will drop by 3% APR from 11.99% to 8.99%.
Small gains in your credit score can lead to big savings. To improve your score, begin with the following tips:
- Eliminate Credit Card Debt:
The quickest way to improve your credit score is to eliminate or reduce outstanding credit card debt. This debt is viewed as unfavorable because it’s “unsecured debt,” meaning no collateral is tied to it.
Try to never spend more than 30% of your total credit limit on any one credit card. For example, if your credit card limit is $10,000, work never to have a balance over $3,000.
- Avoid Additional Debt:
Only borrow money when it’s necessary. When working to improve your credit score, adding new debt to your credit cards or through additional loans will only hamper the process. Plus, any new inquiries on your credit report will temporarily ding your score.
- Set Payment Reminders:
Your payment history plays the largest role in determining your credit score. Work to never miss a loan or credit card payment by setting reminders on your phone, computer, or physical calendar. You can simplify the process by scheduling automatic payments.
- Consolidate High-Interest Debt:
Transferring high-interest credit cards to a lower-rate card or personal loan is one of the best strategies to eliminate debt quickly. You’ll instantly save money in interest, which helps you to pay off outstanding debt faster.
We’re Here to Help!
Building wealth stems from your ability to live within your means and limit expenses. Loan payments, such as mortgages, car loans, credit cards, and student loans, often make up your largest monthly expenses. However, they also provide the greatest saving opportunities. With an excellent credit score, you’ll pay less interest and have more flexibility within your budget.
If you want to learn more about improving your credit score or how debt consolidation can make the process easier, we’re ready to help. Please stop by any of our convenient branch locations or call 800-782-4899 to schedule an appointment.
Each individual’s financial situation is unique and readers are encouraged to contact the Credit Union when seeking financial advice on the products and services discussed. This article is for educational purposes only; the authors assume no legal responsibility for the completeness or accuracy of the contents.