Personal Finance

Raising a ‘Fair’ Credit Score to ‘Very Good’ Could Save Over $45,000

Just because a person’s score is good enough to get a loan or credit card doesn’t mean they should stop working to raise it. Banks, credit card issuers and other lenders offer much better rates to borrowers with higher scores.

We analyzed anonymized loan request and average loan balance data from LendingTree users to see how a lower credit score can increase borrowing costs for the average American with a fair credit score versus excellent score. We compared the range of credit scores generally considered “fair” (580-669) to the range generally considered “very good” (740-799) to measure the difference in costs of the life of loans using the average balances for five different kinds of loans (mortgage, student loan, auto loan, personal loan and credit card). To estimate savings on student loans, we assumed people with a very good credit score could refinance at lower rates, while those with fair credit could not and would pay current undergraduate federal loan rates.

Key takeaways:

  • Raising a credit score from “fair” (580-669) to “very good” (740-799) saves $45,283 on a common array of debts.
  • Mortgage costs account for 63% of the savings ($29,106 in savings with very good credit score versus fair).
  • Paying the minimum balance on an average credit card debt represents the second largest difference, with about $5,600 in savings for a very good versus a fair score. That amounts to someone with fair credit paying 248% more in interest than someone with good credit.
  • Personal loan borrowers can expect to pay 271% more interest on the same loan if they have a fair credit score instead of a very good one, and auto loan borrowers can expect to pay 311% more in interest.

Five common debts

Everyone’s debt profile is different, but it’s pretty typical for an American consumer to buy a condo or house (average mortgage size: $234,437), purchase a reliable car (average loan size: $21,778), take out a personal loan to consolidate old debt (average loan size: $11,258), rack up charges on a credit card (average debt size: $5,265) and pay off some student loans (average debt size: $37,525). That adds up to $310,263 for a lifetime of common American debts. A couple of things about that figure:

  • While the average American may not have $310,263 of debt all at once, it’s still common for borrowers to overlap some or all of these debts at the same time or in close sequence.
  • It’s likely a low estimate of lifetime American debt, because consumers often have more than one loan of each type throughout their lives.

Still, $310,263 is a lot of money, especially when one considers how much all of that debt costs in interest and fees. Assuming a borrower pays every one of these bills on time, this range of debt will cost someone with a very good credit score (between 740 and 799) $212,498 in interest. With a fair credit score (between 580 and 669) a borrower is still likely to qualify for similar loan amounts but can expect to pay around $257,781 in interest and fees, a difference of $45,283.

To put that in perspective, the median earnings for Americans in 2016 was $31,334, before taxes. It would take most Americans well over a year to collect $45,283 of interest via take-home pay — money they’d never have to pay if they had good credit.

Even if you only have one of these loans, you’re still looking at significant savings with a very good credit score. Take a mortgage for example: Assuming every other factor is equal, someone with a very good credit score would have a monthly mortgage payment that is $81 less than someone with a fair credit score. The person with very good credit could invest that money, use it to pay down debts faster or to increase the down payments on future loans, which would exponentially increase the value of those savings over that same 30-year period.

Raising your credit score isn’t as hard as it sounds

The idea of managing one’s credit score can be intimidating and may seem like a lot of effort. The good news is that it’s not as complicated or opaque as many people fear, and it isn’t remotely comparable to the time, effort and stress it takes to work for $45,283 in net earnings.

Changes to your credit score can happen more quickly than we realize, with some people seeing substantial changes in a matter of weeks for things like paying down credit debt. Those who plan to take out a mortgage or loan should refrain from opening new credit accounts, as credit checks and young accounts can lower your rating.

There is a lot of help out there, including our own, free credit analyzer tool.

Credit monitoring can be an essential key to the process because it helps people build awareness of what is currently affecting their scores and how ongoing decisions can change the score. For instance, My LendingTree alerts users to significant changes in their credit report within 30 minutes.

Here are some resources to better understand how credit scores work, how they’re calculated and how you can improve yours.

What if you took out loans before you improved your score?

There are still opportunities to lower the lifetime costs of your existing loans following an improvement in your credit score, although rising interest rates may erode some of the potential savings.

You can:

 

Methodology

For mortgage, personal loan, auto loan and student loan refinancing terms LendingTree researchers aggregated APR offers received by anonymized LendingTree users in May 2018 as an average across credit score ranges. For credit cards, researchers used the published low and high APR rates of a popular card marketed as a low APR product. For student loans, we assumed that those with a very good credit score could refinance at current private refinance rates, while those who don’t continue to pay 2017-18 undergraduate federal loan rates, and we used those rates to calculate potential savings on the average student loan debt. Average debt (student and credit card) amounts were calculated from anonymized My LendingTree user credit report data from TransUnion and average loan (personal, auto and mortgage) amounts were calculated from loans received by borrowers on the LendingTree platform in May 2018.

We assumed credit card borrowers paid the monthly minimum on the existing debt, which we calculated as (principal * 1%) + (accrued interest). For the installment loan products, we calculated potential savings using some of the more popular loan terms in each product: 30 years fixed for a home mortgage, 5 years for an auto loan, 3 years for a personal loan and the federal standard 10-year repayment plan for student debt.