Three HUGE Benefits of a Solid Credit Score
These days, nearly everything that we do involves some sort of credit check. Whether you’re getting a loan or ordering DirecTV, your credit is going to get pulled so that your potential lender or service provider can peek into your financial past.
What people see when they look at your credit report will have a big impact on how much you pay for a loan, as well as what types of loans and services are available to you.
In this article we will consider the ways that a strong credit score can be your ally. Although you may not have stellar credit at the moment, we’ll outline the benefits of turning your financial life around, and beginning to build a solid credit score.
A Good First Impression
A great credit score is a chauffeur, it opens doors for you. When you apply for a loan, one of the first steps for the lender is to pull your credit. When lenders see a strong credit score, their first impression will be positive; they will respect your financial integrity and, most of all, begin to trust you.
This trust is important. Whether you are looking to get a mortgage loan or a credit card, if the lender trusts you, he or she is more likely to consider your application.
Solid Credit Saves You Dough
Let’s talk about the long term benefits of a good credit score, which means let’s talk mortgage loans (home loans). Mortgages are some of the longest financial commitments that people make—they can have terms as long as 30 years, after all.
When you have a loan that lasts that long, the interest rate can have an enormous impact on how much you pay over the life of the loan (and your credit score is a huge factor for what rate you get…more on that later). How big of an impact can the interest rate have on what you pay? Let’s look at a quick example.
In these three scenarios, the loan amount ($300,000) and the term of the loan (30 years) are the same in all three, but the interest rate is different. Notice how the increase in interest rate affects both the monthly payment and the total interest paid over the life of the loan.
|Situation 1||Situation 2||Situation 3|
|Loan Term||30 years||30 years||30 years|
|Total Interest Paid||$279,769.69||$347,515.44||$418,524.05|
A few things to note:
- People who have a 6.0% interest rate will pay $67,746 more in interest than someone who has a 5.0% interest rate.
– That means that an increase of 1.0% on the interest rate results in a 24% increase in the total amount of interest paid.
- People who have a 7.0% interest rate will pay $138,755 more in interest than someone who has a 5.0% interest rate
– That means that an increase of 2.0% on the interest rate results in a 50% increase in the total amount of interest paid.
A Key to Lower Interest Rates
So how much does the interest rate relate to your credit score? Well, a ton. After you apply for a loan, and after the lender has pulled your credit, he or she will “price” your loan with an appropriate interest rate.
[Aside] Here is what “pricing a loan” means: If the lender considers you low-risk, then they will give you a lower interest rate. Likewise, if they consider you high-risk, then they will give you a higher interest rate.
Although your credit score is only one factor that goes into pricing your loan, it is one of the most important.
Take a moment and think about this: Your loan is priced at the beginning, so you have to live with the interest rate agreement for the entire term, or until the loan is paid-in-full. Yeah, that can be a long time. I guess the takeaway here is that improving your credit score right now is pretty important, since it can have a huge positive effect on your financial life for years to come.
The Red Carpet Treatment
A solid credit score doesn’t just get you better interest rates, it also gets you access to more rewarding credit cards.
Financial institutions, like credit unions, usually have excellent rewards programs. If you want to get access to the best ones, then you’ll need a decent enough credit score, among other factors. Deseret First offers an industry-leading VISA Platinum Rewards Card, which you can Learn More about Here.
Remember that credit cards should be handled with care, with a good dose of discipline. At Deseret First, we teach our credit card users to spend prudently. You should, for example, only buy something with a credit card if you can pay off the balance each month, during the grace period. If you have the discipline to follow that pattern, then a rewards card can really pay dividends.
The Next Step
There are clear benefits to having a solid credit score. If you don’t have spotless credit—and many people don’t—then now is a great time to buckle down and start improving things. Then, next time you apply for something, the lender or service provider will take a look at your credit and begin to roll out the red carpet.
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