The Perks that Come with a High Credit Score
August 2, 2015 | Your Finances
So you say you’ve got pretty decent credit.
You pay your car loan on time—90% of the time. And you meet your minimum monthly payments on all your credit cards, even though you’re close to maxing out a few.
As for that personal loan you got while in between jobs? You’re still chipping away at it—albeit five years later.
You may not have an excellent credit score, but pretty good is good enough, right?
Well, that depends on how you feel after running a few numbers: Going from a fair credit score (mid to upper 600s) to a good one (low 700s) to an excellent rating (mid 700s or higher) could save you thousands—even tens of thousands—over a lifetime in the form of more favorable interest rates and financing terms.
“You save money in many areas of your life by having excellent credit,” says consumer credit pro Beverly Harzog, author of “The Debt Escape Plan.” “And the higher your score goes, the more you’re going to save.”
Consider this example: According to calculations by Credit.com, a 35-year-old woman living in Illinois with a credit score in the mid-600s will pay $269,033 in interest over a lifetime between her mortgage, auto loans and credit cards.
If her credit score was in the upper 600s/low 700s, that figure would go down to $229,085. With a score above 740, it drops to $208,491.
Translation: Having an excellent score potentially saves her $60,542 compared to having a fair one—and that’s no chump change.
Does that make you want to stop settling for “pretty decent”? If you’re still not convinced, read on to see how different areas of your financial life could get a boost, all thanks to a stellar credit score.
Sparkling Score Perk #1: Prime Mortgage Rates
Your mortgage is probably where you’ll reap the most savings with a high credit score because it’s likely to be the biggest purchase you’ll ever pay interest on—and the longest amount of time you’ll spend paying something off.
Early June data from MyFico.com found that the average consumer with an excellent credit score—in this case, 760 or higher—was eligible for a mortgage rate of about 3.74%. But those with a score in the next tier down—700 to 759—qualified for an interest rate of about 3.96%.
That less than a quarter of a percent difference may not seem like a big deal, but on a $200,000 mortgage over 30 years, it works out to an additional $9,130 in interest charges.
“That’s real money every month that you’re not able to save,” says John Ulzheimer, a credit scoring pro who’s worked for FICO®, Equifax® and Credit.com.
Gerri Detweiler, Credit.com’s director of consumer education, offers up another way to look at it: “It may only be a few dollars a month [added to your mortgage], but the difference can become significant—in some cases enough to pay for a year or more of college, to take a really nice vacation, or to boost your retirement fund.”
Sparkling Score Perk #2: Preferred Auto Loans
While it’s easier to qualify for a good deal on a car loan than a mortgage, having a high score can still net you some substantial savings.
Consumers with excellent credit were able to get an auto loan at a 3.25% interest rate in early June, according to MyFico.com. But those in the next tier down saw that figure jump to 4.61%.
“With the average person borrowing over $26,000 for a new car these days, that [difference] adds up,” Detweiler says.
Over a five-year loan, the higher rate on that $26,000 equates to an extra $958 in interest—money perhaps better spent on some fancy seat warmers.
Sparkling Score Perk #3: Better Credit Card Rates—and Rewards
When it comes to your plastic, May data from CreditKarma.com found that those with excellent credit were able to qualify for cards with an average annual percentage rate (APR) of 13%, while those with good credit got a 17% APR.
“[The savings] gets a little fuzzier [with credit cards] because, a lot of times, if you have good credit, you’re less likely to be carrying much of a balance,” Detweiler says.
But if you have, say, a $3,000 balance on your card and are chipping away at it by paying $100 a month, at 13%, it would take 37 months to pay that balance off, and you’d shell out $648 in interest. At 17%, it would take 40 months to pay off, with $934 in interest payments.
And if you’re receiving offers in the mail giving you a 0% introductory APR for the first 12 to 18 months, plus no fee on balance transfers, it’s likely because you have an excellent credit score.
“In my mind, that’s the best deal out there right now,” Ulzheimer says. “Someone who’s got poor or even average credit is not going to qualify. Those offers are for people who have elite credit.”
Other possible perks reserved for consumers in excellent standing: airline miles just for signing up, points for every dollar earned, and cash back on purchases—all of which can save you a pretty penny.
Sparkling Score Perk #4: Reduced Private Student Loan Rates
Thinking about finally going back to school for that MBA, but have concerns about the private loans you may have to take out to help cover tuition?
“[Your credit score] can have a massive impact [on student loan rates] because the way lenders look at pricing for their products is based on credit quality,” says Stephen Dash, founder and CEO of Credible.com, a marketplace that connects lenders and students looking to refinance educational loans.
For instance, “if you’ve got a score that’s closer to 850, you’re more likely to fall into the lowest credit-risk bucket. On our platform that rate can be as low as 1.93%,” he says. “If you’re around a 620, you could be closer to 6%–7%. But every lender has a slightly different underwriting criteria, so it’s really important to shop around.”
And considering that the median borrower of a graduate degree takes out more than $57,000, those few percentage points stand to make a big difference over the life of a loan that could be anywhere from 10 to 30 years long.
Sparkling Score Perk #5: Better Small Business Financing
If you’ve got an entrepreneurial drive, a stellar credit score can help get your coffee shop/doggie day spa/marketing consultancy dreams off the ground, because until you build a solid business credit history, lenders will use your consumer score to determine your credit risk.
“When you’re starting a business, virtually any loan you get will involve a personal credit check and a personal guarantee,” Detweiler says. “It’s not until your business is well established—two years old, at a minimum, with significant revenues—that you can generally start to negotiate away personal guarantees and credit checks.”
And even if you have some business credit history, many community lenders may still weigh your consumer credit score more heavily—often to the point of excluding your business credit score, according to a January 2014 report from the Small Business Association.
Another perk of a strong credit score? It could make you eligible for more favorable business lines of credit.
“If you have average credit, you’ll have greater difficulty getting approved for a business loan, or you’ll likely receive a high interest rate,” Harzog says. ”So you’ll be paying interest, instead of putting that money into your business. You might qualify for credit cards, but your limit might be small and the rate might be high.”
And having a high business credit limit may be particularly important as you start out because “it gives you the flexibility to rescue temporary cash-flow issues with a lesser chance of negatively impacting your personal credit score,” she adds.
Sparkling Score Perk #6: Lower Insurance Premiums
You may not realize it, but another area of your financial life affected by your credit score is the premium you pay on your home or auto insurance.
While it’s not the exact same type of score that’s used to determine whether you qualify for a credit card, insurance lenders do factor in information found on your credit report. “The scores insurance companies use are insurance risk credit scores, which are based on your credit but also blend in claims data,” explains Ulzheimer.
That said, the higher your credit score, the more likely you are to land a lower premium. Based on 2013 data, InsuranceQuotes.com found that drivers with median credit-based insurance scores—considered a fair score—paid 24% more for auto insurance than those with excellent credit. And those with poor credit paid a whopping 91% more.
The company found similar results for home insurance in a 2014 study: Those with a fair score could pay 29% more for their policies, while homeowners with a poor credit score could pay 91% more.
Perhaps most important? A higher score improves the chances you’ll actually get insurance in the first place.
“You can be denied coverage altogether [if you have a low score],” Ulzheimer says. “But if you have a solid credit score, it can push you from a denial to an approval.”
LearnVest, Inc. is owned by NM Planning, LLC, a subsidiary of The Northwestern Mutual Life Insurance Company, Milwaukee, Wisconsin.