Focus on the Incentives for Improving Credit Score

Mortgage Rates Illustrated: Incentives for Enhancing Your Credit Score

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Credit Sesame explains why you should focus on the incentives for improving credit score.

Advice about credit often has an “eat your vegetables” tone to it. There are a lot of things you should do. The question is, why would you want to?

Making your payments on time, keeping credit utilization low, maintaining the right credit mix and all the other tips for enhancing your credit score are sound and sensible things to do. But they sound more like chores than things you can get excited about.

Before you focus on the steps towards a good credit score, how about thinking ahead about the rewards for having good credit. Understanding the incentives for improving credit score should give you all the motivation you need to take the right steps. As you achieve your goals, the rewards fuel your enthusiasm to continue working on your credit.

Much like exercising, the hardest part is getting started because there’s nothing to show for it right away. However, as you start to feel healthier, or look in the mirror and see improvement, it becomes easier to make the effort day after day.

Start working on your credit score by taking a peek at the potential rewards. It could give you the enthusiasm you need to embrace the effort towards credit improvement.

Cold hard cash is a compelling incentive

People often talk about credit as an all-or-nothing proposition. Good credit means getting approved for loans, and bad credit means being turned down.

More often though, the impact of your credit score is felt in the price you pay for credit. You can get credit, but the interest rate you are charged depends a lot on how good your credit is.

The problem with interest rates is that percentages don’t make the cost very clear. It clarifies things to translate those percentages into actual dollars. Buying a home and car are good examples.

Buying a home

There’s an eye-watering dollar difference in how much more you pay on a mortgage with mediocre credit compared to very good credit.

Take a 30-year mortgage for example.  A 650 credit score would be considered fair, probably good enough to get a loan. According to the myFICO loan savings calculator, as of September 12, 2022 a 650 credit score would get you a 30-year fixed mortgage rate of 6.442%.

Now suppose instead you had a 750 credit score. That’s considered very good, but not exceptional. As of September 12, 2022, a 750 credit score could have qualified you for a 5.621% 30-year fixed mortgage rate.

If we consider the dollar amounts paid at those interest rates over 30 years, the difference may surprise you.

  • $300,000 mortgage amount
  • $378,519 interest paid with 650 credit score
  • $321,436 interest paid (0.832% lower) with 750 credit score
  • $57,083 less interest paid with higher credit score

That’s nearly $2,000 per year less to pay every year for 30 years. Lower interest on home loans is just one of many incentives for improving credit score. That kind of money makes a material difference to daily living and provides concrete motivation to work on your credit score.

Buying a car

If you have no plan to buy house, what about a car?

According to Experian’s 2Q 2022 State of the Automotive Finance Market Report, in the second quarter of 2022 a 650 credit score could have gotten you a 6.57% interest rate on a new car loan. A 750 credit score could have gotten you a 4.03% rate.

Based on the Cars.com Car Loan Calculator, on a $30,000, six-year new car loan that 6.57% interest rate would cost you a total of $6,381 in interest over the life of the loan. On the same type of loan a 4.03% rate would cost you a total of $3,823 in interest.

  • $30,000 new car loan
  • $6,381 interest paid with 650 credit score
  • $3,823 interest paid(2.54% lower) with 750 credit score
  • $2,558 less interest paid with higher credit score

A 100-point improvement in credit score means paying $470 per month versus $505 per month and $2,558 saved over the six-year loan period. Imagine if that went into a savings account instead of car payments. Another one of the great incentives improving credit score.

Home ownership is a long-term wealth builder

Home ownership has even more incentives for improving credit score. In addition to a weak credit score costing more in interest on a home loan, it could cost you even more if you’re turned down for a mortgage. Home ownership is a key to building long-term wealth. Think of it as the difference between spending and investing.

When you pay rent, the money is spent and gone. Having a place to live may be an essential expense, but at the end of the month your rent payment leaves you with nothing of lasting value.

Buying a home is more like investing. Your mortgage payments are divided between interest and principal. The interest portion is like spending. It leaves you with nothing of lasting value. However, the principal portion increases the amount of equity you own in the home.

This equity not only has lasting value, but over the long term that value often increases as housing prices rise.

One way or another, you’re going to pay for a place to live. However, a good credit score can make the difference in being able to build wealth by investing in buying a home or spending that money on rent with nothing to show for it in the end.

The right job opportunity can be a life-changer

The examples so far show the impact your credit score can have on the costs you pay. You might be more surprised to find your credit history can even affect what you earn.

Many employers these days look at credit reports as part of their background checks on potential employees. They don’t typically have access to credit scores, but they see the credit history that goes into your credit score. So, working on your credit score can also improve the way your credit report looks.

Employers check your credit report for insight into how responsible you are. They also want to look for signs of financial problems that could cause distractions on the job.

A job interview can be one of those crossroads in life that makes all the difference. The right job can be an opportunity to earn more money not just now, but over the course of your career. It would be a shame to have credit problems stand in your way.

The incentives for improving credit score are real

Clearly, your credit record can make a big difference to you financially. So, treat it like you would anything else of great monetary value.

Take good care of your credit record. Understand the things that affect your credit score, so you can work to improve them. Sign up for credit monitoring so you can keep a close eye on changes to your credit status.

A good credit score is not only a status symbol, it gives you more access to credit and saves you money.

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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

Richard Barrington
Financial analyst for Credit Sesame, Richard Barrington earned his Chartered Financial Analyst designation and worked for over thirty years in the financial industry. He graduated from St. John Fisher College and joined Manning & Napier Advisors. He worked his way up to become head of marketing and client service, an owner of the firm and a member of its governing executive committee. He left the investment business in 2006 to become a financial analyst and commentator with a focus on the impact of the economy on personal finances. In that role he has appeared on Fox Business News and NPR, and has been quoted by the Wall Street Journal, the New York Times, USA Today, CNBC and many other publications.

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