Thursday, August 30, 2018

A good credit score benefits consumers in many ways. In fact, it can even save you hard-earned cash. According to a recent study from LendingTree®, raising a 'fair' credit score to 'very good' could in fact save consumers more than $45,000.

To arrive at this figure, LendingTree researchers 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 versus excellent credit score. The analysts compared the range of credit scores generally considered "fair" (580 to 669) to the range generally considered "very good" (740 to 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).

The results revealed the following:

- 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 percent 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 percent more in interest than someone with good credit.

- Personal loan borrowers can expect to pay 271 percent 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 percent more in interest.

The Most Common Debts
Everyone's debt profile is different, but it's 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 few 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 considering 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 would never have to pay if they had good credit.

Even with only one of these loans, the borrower would still see 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’s $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.

The solution? Credit monitoring, says LendingTree. By keeping a consistent eye on your credit score, consumers can see changes to their score, catch errors and take immediate steps to improve their score.

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