If you’re in the market for a major loan of some kind – such as a mortgage or auto loan – you will likely find out that these lines of credit can be quite expensive on a monthly basis.
But did you know that your credit score has a significant impact on the amount you’ll end up paying on that loan? Obviously this rating is well known for being used to determine whether you will qualify for any line of credit you may want to apply for, but it’s often used to set the terms of a loan as well.
For example, did you know most lenders use your credit rating to determine the interest rate you’ll pay on anything from a credit card, mortgage or auto loan? The lower your score, the higher your loan’s APR. That’s because lenders are trying to make as much from a riskier investment – which is essentially what a low credit score would tell them you are – as they can.
Of course, you might be saying that the difference in a mortgage payment of fractions of a percent in interest isn’t that considerable on a month-to-month basis, and that’s certainly true. Let’s say you have to pay an extra $50 a month because of your lower credit score. It might not sound that difficult to afford, but it helps to think big picture as well. If you get a 30-year mortgage, for example, that’s 360 months, and $50 more per month costs you an additional $18,000 over the life of the loan. That’s a lot of money.
For this reason, when you’re thinking about applying for a sizable loan, you should first take steps to determine your credit score and think about ways you can improve it. Pay down outstanding credit card debts, make sure to make all your payments on time and in full, keep your accounts open, don’t apply for new a lot of lines of credit. These are all ways you can improve your score over the course of a few months, and all of them will put you in a better position to receive more affordable loan terms.
And obviously, when you’re mulling whether to apply for such a line of credit, you should think about whether it makes sense when you take all aspects of your finances into account.
Image: Shorts and Longs | The Both And, via Flickr