Leveraging an Excellent Credit Score

Among the privileges that come with an excellent credit score, the most important must surely be access to interest rates that are significantly lower than those available to less creditworthy consumers. Lenders love dealing with low-risk borrowers and are happy to compete for their business. But just how much can someone save with a stellar score?

Savings on Mortgages

FICO, the company that owns the credit scoring systems used in 90 percent of lending decisions, provides on its website a handy calculator which allows potential borrowers to work out the mortgage rates they may pay based on their personal scores. Of course, rates -- and possible savings -- go up and down all the time, but a snapshot example from Dec. 12, 2014, based on the national average for a 30-year fixed-rate mortgage of $280,000, looks like this:

  • FICO score of 760-850: Monthly payment of $1,251, and a total interest cost over the 30-year lifetime of the loan of $170,277.
  • FICO score of 700-759: Monthly payment of $1,286, and a total interest cost over the 30-year lifetime of the loan of $182,826.
  • FICO score of 680-699: Monthly payment of $1,314, and a total interest cost over the 30-year lifetime of the loan of $192,962.
  • FICO score of 660-679: Monthly payment of $1,348, and a total interest cost over the 30-year lifetime of the loan of $205,370.
  • FICO score of 640-659: Monthly payment of $1,419, and a total interest cost over the 30-year lifetime of the loan of $230,799.
  • FICO score of 620-639: Monthly payment of $1,511, and a total interest cost over the 30-year lifetime of the loan of $264,015.

It's important to note that this isn't a comparison between excellent and subprime scores. Even those paying the most on this scale would, by many definitions, be at the high end of the fair credit category. And yet the cost of their borrowing would likely be $93,738 higher than that paid by their most creditworthy counterparts.

Savings on Credit Cards and Auto Loans

A glance at LendingTree's credit card comparison-shopping service shows the range of interest rates charged on plastic to people with different credit. At least one company charges an annual percentage rate (APR) as high as 22.99 percent, while its low rate is 10.99 percent -- entirely dependent on the applicant's creditworthiness. Contrast that with the rates on offer to those with only fair credit: only one card currently on that page offers any rate at all below 20 percent, while another charges 24.99 percent to all its customers.

In short, it's easy for someone with an excellent credit score to pay close to half as much for borrowing on plastic as someone with a fair one. Indeed, if one's prepared to forgo rewards, one can pay at little as 7.25 percent APR -- providing one has fantastic credit.

The situation with auto loans can be even more extreme. Someone with a subprime score can easily pay an interest rate more than four times higher that of a person with an excellent one.

Leveraging a Score

Consumers benefit from their high credit ratings every time a new account is opened and a low rate received. However, an individual's score drifts up and down surprisingly often, even when spending and paying habits seem hardly to change. That's because the algorithms used by FICO and its competitors are extraordinarily complicated and sensitive. Even when a credit card balance is paid in full each month, for example, if the balance is high at the time the creditor reports to credit bureaus, the consumer's score could lose a few points. Given that a variation of just a few points can change an interest rate, it's important to check one's credit report and score before making applications for important new borrowing, like a mortgage.

Indeed, a better solution may be to constantly monitor them, something that can be done entirely without charge using LendingTree's credit score service, which provides free monthly updates. Armed with this information, it may be possible to nudge a score up at a critical time, perhaps by paying down a little more credit card or other debt. While it's true that the benefit of having a low credit utilization ratio (the percentage of one's credit limits taken up by card balances) drops much less sharply below the magic 30-percent level, a few points more can generally be earned by bringing it down to 20 percent or 10 percent. As well as trying to drive it up, it's important to guard against the score sliding down, and that means avoiding opening new accounts before a major borrowing event. It can also be a bad idea to close accounts at these sensitive times.

It takes real effort to achieve an excellent credit score. So it's worth both keeping it and enjoying its benefits.

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