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Raising a ‘Fair’ Credit Score to ‘Very Good’ Could Save Over $56,000

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Even if your credit score is high enough to qualify for a personal loan or credit card, you shouldn’t stop working to increase it. A higher credit score could mean more competitive terms on credit you apply for.

To better understand how borrowing costs vary between the average American with a fair versus excellent credit score, we analyzed anonymized loan request and average loan balance data from LendingTree users, among other sources. We compared the range of credit scores generally considered “fair” (580-669) and “very good” (740-799) to conservatively measure the difference in costs of the life of loans using the average balances for five different kinds of loans (credit cards, personal loans, auto loans, student loans and mortgages).

Key takeaways

  • Raising a credit score from fair (580-669) to very good (740-799) saves $56,400 across five common loan types. That’s an average total difference of $316 a month.
  • Mortgage costs account for 73% of those savings ($41,416 in savings with very good credit score versus fair).
  • Refinancing student loans comes with the second biggest savings difference at $4,707, or 8% of the total difference in interest.
  • Borrowers with fair credit can expect to pay more than twice as much in interest for personal, auto and student loans, and 97% more on credit cards.

How much interest these 5 debts would cost depending on your credit

Between buying a home and a reliable car, paying for an education and juggling other debt and financial obligations, achieving the American dream is expensive. Consider the average debt amount across the five debts analyzed:

  • Credit cards: $3,668
  • Personal loans: $11,342
  • Auto loans: $25,346
  • Student loans: $35,208
  • Mortgage: $253,435

Besides paying back the borrowed money, interest and fees make these debts expensive. Assuming a borrower repays all five debts on time, their total costs for interest and fees will amount to $233,209 (for very good credit) or $289,609 (for fair credit). That’s a difference of $56,400 in interest and fees. (To put that into perspective, the median earnings for Americans in 2018 was $35,291, according to the U.S. Census Bureau.)


Even Americans who don’t carry all five of these debt types can save significantly with very good versus fair credit. Assuming every other factor is equal, someone with a very good credit score would have a monthly mortgage bill that is $115 lower. They could invest that money, use it to pay down other debts faster or save it for down payments on future debt, which would exponentially increase the value of those savings over that same 30-year period.

Many borrowers would see bigger savings than estimated

Due to limitations in data availability and variability between loan terms, exact averages can be elusive for a few products across credit score bands. In those instances, we aimed to conservatively estimate debt costs downward, which naturally reduces the differences between high and low APRs.

Credit cards: Determining potential savings on credit card interest rates is difficult to pin down as issuers offer differing APRs across multiple kinds of cards to consumers with varying credit profiles. But Matt Schulz, the credit card industry analyst for CompareCards, revealed how APRs range among consumers:

“The average APR for a new credit card offer is 20.6%, but even for folks with excellent credit, the average APR offered is about 17%. For those with crummy credit, the average is about 24%.” (CompareCards is a wholly-owned subsidiary of LendingTree.)

Auto loans: The difference in interest payments for car loans would be higher for many borrowers. The average origination amount in this analysis is based on borrowers who typically shop on the LendingTree marketplace; most of those borrowers are looking for used cars while those purchasing new cars originate larger loans. We also used the traditional 60-month term as our comparison point, but the average loan term is actually 65 months for a used car and 69 for a new one.

The longer the term length and the higher the originated loan amount, the bigger the difference in interest paid.

Student loans: The estimated current interest costs on student loans is likely understated for the majority of borrowers. Here, we used the current rate offered to undergraduate students taking federal direct loans. However, these loans represent just over half of the outstanding federal loans; that percentage drops once private student loans are added to the mix.

On the other hand, the current interest rate on federal loans is the highest it’s been since 2010, so those who only owe on direct loans originated in the last decade are paying at a lower interest rate.

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

The idea of managing your credit score can be intimidating and 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 a net $56,400.

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

Credit monitoring can be an essential key to the process because it helps you identify things affecting your credit score and how ongoing decisions can change it. 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.

Those with particularly difficult credit histories, such as victims of identity theft, might consider hiring a credit repair service.

What to do if you took out loans before improving your credit score

Even if you have existing debt with interest rates that are higher than you’d prefer, you may have options for dealing with them. For example, you could:

  • Refinance your existing loans, including mortgages, student loans and car loans
  • Consolidate your debt with a personal loan at a lower interest rate
  • Shop around for a credit card with a lower interest rate, or even a 0% introductory balance transfer APR

These can help you reduce the total cost of your debt over its lifetime, especially if your credit score has improved since you first borrowed.

Methodology

Average loan balances and interest rates for personal, auto and mortgage loans were calculated from loan requests and offers from loan amounts requested by inquiring borrowers on the LendingTree platform in Q3 2018 and aggregated by credit score band.

Average credit card balance was calculated using a combination of data sources, including the New York Federal Reserve, anonymous My LendingTree user reports and TransUnion.

Credit card rates were provided by Matt Schulz, chief industry analyst at CompareCards, and average credit card balance was calculated using a combination of data sources, including the New York Federal Reserve, anonymous My LendingTree user reports and TransUnion. We assumed credit card borrowers paid the monthly minimum on the existing debt, which we calculated as (principal * 1%) + (accrued interest).

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 current undergraduate federal loan rates. Average student debt was calculated from anonymized My LendingTree user credit report data.

 

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