The Lifetime Value Of A Good Credit Score

It is one of the most important numbers that will be associated with you during your lifetime.  But it’s not your Social Security number. It’s your credit score, that three digit number derived from a  history (maintained by a credit bureau) of how you’ve repaid your bills and used credit.  An excellent credit score can dramatically reduce your borrowing costs over your lifetime and can literally open doors—your credit score might even affect how ready a landlord is to rent to you.

Alex Linter, president of Experian’s Consumer Information Services, suggests you think of your credit score as a reflection of your financial reputation.  “Just like any other reputation, a financial reputation is developed by a track record. How have you behaved?” he says. “If you look across millions of people, the scores distributed out there are indeed reflected by behavior.”

Here’s a look at some of the ways a credit score can affect your financial life.

Mortgages

A bad credit score can dramatically affect the amount you’ll pay when buying a home. Simply put, the higher your credit score, the lower your mortgage APR. An APR, or the cost to you of borrowing money, includes the interest rate and any other charges associated with borrowing money from a lender.

“Just a single percentage point or two in interest rate as a result of your credit score either way can make a huge difference,” says Bruce McClary, vice president of communications for the National Foundation for Credit Counseling. “If you think about how much you can save over your lifetime if you have a top credit score versus someone who has one on the bottom, it can be in the tens of thousands.”

For example, for a 30-year fixed loan, those with a fair credit score of 620 will likely receive an APR of about 6%, according to myFICO. Alternatively, people with an excellent credit score of 760 or above would receive an APR of about 4.39%.

Let’s say you wanted to borrow $100,000, and had a credit score of 620. Using the APRs above, you would pay about $115,000 in total interest. But if your credit score changed to 760, your total interest paid would be only about $80,000. With a better credit score, you would save about $35,000.

For those who aren’t able to afford a home, renting can be a more realistic option. But many landlords consider credit scores when approving or denying a rental application. According to a 2014 TransUnion study, 48% of landlords said the results of a credit check are among the top three factors used when deciding whether or not to accept a tenant’s lease application.

Credit Cards

When shopping around for credit cards, you will often see a range of APRs that are offered with the card, followed by three key words: “based on creditworthiness.” A good credit score can mean the difference between an APR in the mid-teens or one in the upper 20s. In some cases, it may also mean the difference in getting a credit card or not.

Only 6% of the U.S. credit card holding population has a credit score of 579 or less, according to a 2017 report by the Consumer Financial Protection Bureau.

McClary, of the National Foundation for Credit Counseling, offers a tale of two credit scores.

Take someone who has a low credit score, less than 660, with a credit card balance of $6,015.

Due to their low credit score, they pay a hefty 25% interest rate. With this card, minimum monthly payments are calculated at about 2% of their balance, so they must pay at least $150 a month. At this rate, it would take this person 87 months, or about seven years, to pay off their debts. In addition to the $6,015 owed in principal, they would have paid $7,035 in interest alone, totaling $13,050, McClary calculates.

Now, swap in a person who has excellent credit, with a score of 750 or above. The same scenario applies, except this person has been offered a 10% interest rate. With a good credit score, this person is able to pay of their debt in about 49 months, or four years. In addition to the $6,015 in principal, this person would only pay $1,329 in interest. In total, they would pay $7,350 – a $5,700 difference from the person with bad credit.

“That underscores the benefit of having a good credit score,” McClary says. “The money you save can then go to help build your retirement savings. You can have a financially secure future.”

In addition, those with high credit scores are more likely to have access to cards with a 0% introductory APR on balance transfers.

Of course, there is an inverse relationship between credit cards and credit scores. Late or missed credit card payments can almost always damage a credit score, as can the amount of debt you carry.

The same goes for bank accounts. While a bad credit score won’t necessarily prevent you from opening a checking or savings account, it could be a factor. Some banks use databases like ChexSystems, a check verification service and consumer credit reporting agency. These databases don’t provide credit scores, but will check for a history of failed payments. So late or missed payments can hurt not only your credit score, but, in some cases, your access to banking services.

If you have a bad credit score, there is hope when it comes to student loans. Some federal student loans, like Stafford loans and Perkins loans, are not based on credit history. Federal PLUS loans do require a credit check, and to receive one, you must not have an “adverse credit history.” If you do, you can enlist a cosigner, or petition the U.S. Department of Education that there are “extenuating circumstances” relating to your adverse credit history.

However, private education lenders do consider credit scores, and a good score helps borrowers get a better interest rate. According to FinAid.org, many lenders break down their interest rates into five tiers based on the borrower’s credit score. About 20% of the borrowers get the best rate, followed by 35%, 20%, 10% and 15%, according to the site. Again, those with bad credit can get someone to cosign their private student loans.

Car loans – for which payments hit a record high in June – are also affected by credit scores. New vehicle loans for people with excellent credit, above 780, will typically carry APRs of about 3.23%, according to an Experian report. For those with bad credit, with scores between 501 and 600, APRs can shoot up to 11.35%. This can mean the difference between a $500 or $537 average monthly payment, which adds up if you consider that the average loan length is around 72 months.

Personal loans behave similarly to car and student loans – the better your credit score, the lower your interest rate. Linter, of Experian, says he had experience with getting a loan with no credit. In 1984, he came to the U.S. from Germany to study, but needed to take out a personal loan to start his own business.

As an immigrant, he says, he had no credit score. But he was eventually able to find someone to write him a $20,000 loan. “That short term loan was only possible because it was someone who worked outside of traditional credit system,” he says. “I paid 35% interest for 12 months.”

After about a year, he ended up having to pay back about $27,000 in total, he says – a number that would have been lower had he had a U.S. credit history showing timely payments.

Insurance

In some states, a credit score can help determine your car insurance premiums. In fact, a recent WalletHub study found that, on average, people with no credit pay 67% more for car insurance than people with excellent credit. In New York, for example, single drivers with good credit scores and good driving records pay an average of $255 more in annual premiums than those with excellent credit scores, according to a 2015 Consumer Reports study.

Ethan Dornhelm, vice president of Data & Analytics at FICO, says that insurers may use a credit-based insurance score, which is based on credit report data but shows how likely a person is to have insurance claims in the near future that will result in a loss for the insurer. However, these scores are only part of your insurance application – insurers also use information such as motor vehicle reports or home inspections.

While your credit score won’t usually affect your health insurance or life insurance rates, it can have an impact on home insurance. According to Bankrate, homeowners with fair credit can expect to pay 32% more for their home insurance policy than those with excellent credit. Rates for those with poor credit are two times higher, on average, according to the site.

In the final analysis, having an excellent credit score can save you tens of thousands of dollars, and maybe even more, over your lifetime.