You could look at a recent FICO chart to determine the cost of monthly loan payments associated with different credit scores, but at first glance these numbers might not be enough of an incentive to try improving your credit situation. After all, interest rates are so low that even if you have a below-average score of just 640, FICO estimates your interest rate on a 30-year-fixed rate $300,000 mortgage today will come to a mere 5.175%. You’re still coming out a winner. In the ’80s, that rate wouldn’t have gone to an applicant with perfect credit.
So why bother boosting your credit score? Well, slight differences in interest rates add up to significant additional spending or savings over the life of a loan. And when you consider what you could do with savings associated with improved scores, the financial advantages that lie between good and great become more apparent.
Here’s the math:
To qualify for the lowest interest rate on a mortgage today you need a credit score of at least a 760, according to FICO. Let’s say you apply for a $300,000 mortgage. FICO’s chart indicates that the average interest rate on a 30-year fixed rate loan with top-notch credit is 4.132%. Your monthly mortgage payment would be $1,455.
Total interest payments: $223,861.
[Infographic: How Much is Your FICO Score Costing You on Your Mortgage?]
If your credit score were 100 points less, or 660, your interest rate on that same loan would be 4.531%, still amazingly low. Monthly payments would come out to $1,526, a savings of about $71 a month. That may not seem like much, but over the life of the loan you’ll save more than $25,000 in interest payments. That could be enough for a new car, a down-payment on a second home or a child’s first year in college.
But why stop there? If you took that $71 monthly savings and reinvested it in your 401k, earning an average 8% annually over those same 30 years, you’d end up with more than $113,000 for retirement. Even if you invested it in a traditional savings account, earning an average 3% annually over 30 years, that’s $71 a month turns into $41,847.
Can’t wait to lower your credit score? Check out these helpful applications.
[Resource: Get your free Credit Report Card]
Image: Paul Schadler, via Flickr