How Raising Your FICO® Score May Save You Thousands
Learn how raising your FICO® Scores from poor to fair or even from good to excellent can help you save tens of thousands of dollars over your life.
Photo by Monstera on Pexels
Most people know that a good FICO® Score is essential for credit card and loan approval. Another perk of good credit: the money-saving potential. Because your credit plays a role in so many transactions, it can help you save tens of thousands of dollars over your lifetime. Here are a few ways your good credit habits can keep more money in your wallet.
Make Homebuying More Affordable
Your FICO® Scores play a key role in financing a home, influencing how much you can afford to borrow and the interest rate you qualify for. You could shave $56 off the monthly payment on a $400,000 30-year mortgage just by improving your FICO Scores from good to very good. The small interest rate difference between the two score tiers would save you more than $20,000 in interest over the life of the loan.
Save Interest on a New Auto Loan
With the average price of a new car at $48,000, some car buyers with auto loans may see their monthly payment top $1,000. A car buyer with a 620 FICO® Score would pay $1,052 monthly on a 60-month auto loan while a buyer with a 720 would pay $906—almost $100 less. The buyer with the higher score would also pay $9,000 less in interest.
Improving your credit score before buying a car is worth it. Minimizing interest on an auto loan is critical because of how quickly vehicles depreciate.
Minimize the Cost of Carrying a Credit Card Balance
Credit cards typically offer a range of interest rates, with each cardholder ultimately receiving a rate based on their credit history. Because credit cards don't have a fixed repayment schedule, having a higher rate means it will take you longer to pay off your balance compared to someone with a lower interest rate.
For instance, paying off a $5,000 balance at 18.24% APR with $250 monthly payments would take 25 months. You'd pay a total of $1,006 in interest on the balance.
However, if you qualified for the card's higher rate, say 25.24%, the payoff time would increase to 27 months and you'd pay $1,557 in interest, even with the same monthly payment.
You can also take advantage of a high FICO® Score by applying for a 0% balance transfer credit card. If you can afford to be aggressive with payments, moving a high interest rate balance to one with a 0% introductory rate would let you completely eliminate interest.
Lower Insurance Costs
In many states, some insurance companies use credit-based insurance scores, among other factors, to set your premium. Having a higher insurance score—which is based on much of the same information as your FICO® Score—can qualify you for lower rates.
In Washington, for example, safe drivers could save up to $800 each year on auto insurance premiums by improving their credit, based on research from the Consumer Federation of America.
Access Money-saving Credit Card Perks
The benefits of having good credit go beyond saving money on interest—you can also qualify for credit cards with perks that save money.
Credit cards with car rental protection, for example, let you skip the agency's pricey policy and instead rely on your credit card's coverage.
If you're a frequent traveler, a credit card that waives checked baggage fees is a no-brainer. Checking your first bag for free would save $60 on roundtrip solo flights. For a family of four, you'd save up to $240 per trip, as long as your card waives the fee for companions.
Benefits do vary by credit card, so comparing a few of your top choices can help you size up credit cards and choose one that suits you best.
You still have time to save money…
Don't worry that you'll be stuck with higher pricing forever. With healthier credit habits—like consistent on-time payments—your FICO® Scores can improve. When the time is right, you can refinance, transfer a balance, or shop around for better deals.
Get your FICO® Score from FICO, for free. No credit card required.
LaToya Irby is a financial writer with over 14 years of experience. She's been quoted and published as a credit expert in several major publications including USA Today, U.S. News and World Report, TheBalance.com, and The Chicago Tribune.