You’ve probably heard that improving your credit score can benefit your life in many ways. However, it’s often not clear exactly what the concrete benefits of better credit are. How can you use a higher credit score to live a happier, financially secure life? Let’s take a look at 5 ways that a strong credit score saves you money.

1. Improve Your Credit Score Before Buying A Home, & Save Thousands of Dollars On Your Mortgage   

The interest rate you pay on your mortgage is almost entirely determined by credit scores – specifically your FICO mortgage score. When issuing a mortgage, the lender will order your FICO mortgage score from each credit bureau.  

They will then take the middle of your three scores, and use that score to determine your interest rate. For example, if you have a 650 FICO with Experian, a 629 with TransUnion, and a 623 with Equifax, the lender will use the 629 (with TransUnion) to determine the interest rate you’ll pay on the loan.

Suppose you purchased your home with a somewhat low credit score, as in the example above. After all, a 620 mortgage FICO is the minimum score to qualify for many mortgage loans, so you’re clearly at the lower end.

If instead your middle FICO score were above 720 when you purchased, you would have been offered a substantially lower interest rate than with a 629 FICO. The interest rate you’re offered with a strong credit score (over 720), is known as the prime rate. 

Let’s assume that the prime rate offered when you bought your home was 3.2%. Given current interest rates, that seems fairly realistic,        

However, with your 629 middle FICO score, let’s assume you have to pay a considerably higher rate, of 4.3%. Let’s also suppose you’re buying a home for $230,000, which is slightly below the median home price in the United States in 2019.   

With a 3.2% interest rate, a 20% down payment, and a mortgage term of 30 years, you would pay $796 per month towards your mortgage. Doesn’t sound too bad? 

Now,let’s assume you have to pay 4.3%. With this higher interest rate, you’re now paying $911. That’s $115 extra per month, or $1380 more per year.   

Do you think you could make better use of this money than the bank? I bet you could. Imagine if you invested that money. 

Since the late 1950’s, the stock market has risen (adjusted for inflation) by an average of 7% per year. $1380, in just 10 years, compounded each year, would be $2,715. In 30 years, it would be $10,505.                     

What if you worked on your FICO score for a year, before purchasing a home? Suppose you use the credit repair process to remove a couple of negative items from your credit reports (maybe a few collection accounts, from several years earlier). Let’s also say you pay down some credit card debts, which were also holding back your score.

Your middle FICO mortgage score is now 705. With a 705, you should qualify for highly competitive interest rates – let’s say you’re offered a rate of 3.35%. Your monthly payment will be $811. 

In just the first year of this mortgage, you’ll save $1200 ($100 per month). If you invested that money in the stock market, assuming the same rate of return as earlier, you’ll have $2361 after 10 years, or $9,135 after 30 years. Clearly, getting your credit in order before buying a home can save you lots of money.

2. Use Your Strong Credit Score To Refinance Your Existing Mortgage   

What if you don’t have time to wait, and need to purchase a home with a slightly lower credit score? Maybe you need to move immediately. Or, perhaps home prices in your neighborhood are increasing quickly, and you’d like to lock in a good deal as soon as possible.

In these cases, you’ll obviously pay a higher interest rate (at least starting out). However, you do have the option of refinancing your mortgage. How does a refinance work? 

Essentially, a new mortgage is opened (in your name), typically with a new lender. The new lender pays off whatever was owed on the old mortgage, and issues a new loan. In most cases, the new mortgage will be for a smaller amount than the previous mortgage, since you’ve already paid down some portion of the previous balance.

One of the most common reasons to refinance your mortgage, is to reduce your interest rate, and thus further slash your monthly payment amount (as well as what you’ll pay in total, as compared to the old loan). However, to enjoy major mortgage savings, you’ll first need to substantially improve your credit score.

The good news is that this is very doable. First, opening a mortgage, and paying on time every month, can offer a solid boost to your credit score. 

You’ll also have a chance to work on negative credit items on your credit reports, such as collections and late payments. Removing some of these items, if they are reported in an incomplete, innacurate, or non verifiable manner, will further boost your score.

Once your credit score is in a stronger position, you can contact the bank you obtained the original loan from (or another lender), and let them know that you would like to refinance the loan. In most cases, you need to wait for at least 12 to 18 months after you signed up for the original mortgage, before you apply for a refinance.

Keep in mind that a mortgage refinance typically involves certain fees and closing costs. In some cases, lenders will waive these expenses when you’re refinancing, since interest rates are low, and many lenders are competing for your business.       

3. Save On Your Auto Insurance

This isn’t as widely known, but your credit history can play a major role in determining what you’ll pay for car insurance. In fact, research from Consumer Reports found that in Texas, Florida and many other states, having poor credit history is worse for your insurance rates than having strong credit, and being caught driving under the influence of alcohol!

Let this soak in for a minute. Insurance companies think that someone who has been caught driving drunk (but has great credit), is less of an insurance risk than someone who was never caught driving intoxicated, but has had issues with their credit and finances.           

Fortunately, the reverse also holds true. As your credit scores improve, you’ll be able to save on your car insurance. 

Unfortunately, this does not happen automatically. You will need to contact your insurance company, and inform them that your credit score has increased, and so you would like your auto insurance rates to be adjusted accordingly.  

If your insurer declines to cooperate, don’t worry. Their goal is (usually) to make as much money as possible. You should contact an insurance broker, who works with a range of carriers, and find out if they can help you obtain a better rate. Quite often, you’ll realize substantial savings. Google and Yelp are good places to look for an insurance broker to assist you.

3.  Refinance Your Auto Loan

Just like mortgages, the interest rate you’ll pay on an auto loan is heavily determined by your FICO score. The lower your scores, the higher the interest rate you’re facing. 

If you’re buying a $25,000 car with a credit score of 720 or higher, on a 36 month loan, you’ll save nearly $4600, as compared to buying the same car with a credit score of around 690. You end up paying more than 3.5 times as much in interest.   

Fortunately, there is a solution. Let’s say you buy a car, when you have a 607 FICO score. Because of your relatively weak credit, you pay 13% interest on your auto loan. That is very high. 

Over the next year, you work on your credit. You address a few collections accounts, and use the credit repair process to remove them from your credit reports. You pay the auto loan on time every month, and even open a credit card, which you also pay on time every month. At the end of 1 year, you’ve improved your FICO score from 609 to a 697.  

If you had applied for the original loan with this interest rate, you probably would have qualified for a 6% interest rate. However, that door has not closed.

You have the option of refinancing your auto loan. Just as with a mortgage refinance, when you refinance an auto loan, the old loan will be paid off. You’ll open a new loan, with a lower interest rate. 

In this case, let’s say that you bought your car for $30,000 one year ago, with a loan of $25,000 (the down payment was $5000), and a 4 year repayment period. Let’s also assume that after one year, you still owe $18,750 on the loan. 

Let’s assume that you refinanced this $18,750 loan, at a 6% rate. Let’s also say that this new loan carries a 3 year repayment period (remember, there were 3 years left on the original loan). With the 13% interest rate, you were paying $631.76. Over 3 years, you would have paid $3,993.42 in interest.

At 6% interest, you’ll pay just $570.41 per month, a savings of $61.76. Each year, that means you are saving around $736 each year, which adds up to $2208.61, over the remaining 3 years of the loan. Again, do you think you could make better use of that money, than your auto lender? We thought so.

4. Refinance Your Student Loans

It’s no secret that student loan debt is a huge issue in our country. With more than $1.5 trillion in outstanding student loan debt, as of early 2019, millions of Americans are paying down these debts.

Fortunately, with a strong FICO score, you might be able to save money on your student loans. Government-backed federal student loans don’t carry any credit score requirements. Whether you have a 570 or 815 FICO score, you’ll qualify for federal student loans – and pay the same interest rate. In many ways, this is a good thing. After all, very few students begin college with much credit history. Even many graduate students lack strong credit history.

Federal student loans offer relatively decent interest rates, and strong borrower protections. As of 2019, undergraduate loans carried interest rates of 5.05%, while graduate student loan rates tended to be past 6%. These loans also offer strong borrower protections.

 If you lose your job, or otherwise run into trouble making payments on the account, you can postpone payments (known as forbearance), or request some form of income-based repayment. The flexibility of federal student loans is a major positive point.      

At the same time, for some people, it might be possible to save money by refinancing student loans. Let’s say you have a stable, well-paying job. Perhaps you’re an accountant, or a dentist, or an attorney. 

You’ve been at your job for several years, and if you had to move to a new employer, you wouldn’t have much trouble. For this reason, things like income-based repayment, or protections in the event you lose your job, are not quite as important for you.

In such a situation, it could make sense to refinance into a student loan with a lower rate. After all, you’re less likely to need income-based repayment, or other protections. Private, refinanced student loans typically offer interest rates of 3.5% or less (again, assuming a strong credit score), which are a substantial savings over federal loans.

When you were in college (or graduate school), you were probably newer to credit. Therefore, you probably didn’t have a very high credit score. However, once you’re several years out of school, it’s possible to build a better score. 

You pay your student loans on time, and use credit cards wisely. If you have any negative credit items, such as collections, you work to have them removed. With a higher credit score, it’ll be much easier to qualify for low-interest, refinanced student loans. 

5. Invest The Money You’ve Saved Through Excellent Credit

What should you do with all the money you’re saving each month? You could spend that money, and use it to buy things and experiences you enjoy. These include that Michael Kors bag you’ve had your eye on, or seats behind the dugout of your favorite baseball team. When you have more available funds, it makes sense to spend some part of it on things that bring short-term happiness

At the same time, if all you do is spend, you’ll find yourself falling behind. To build long-term financial security, you must consistently save and invest. Of course, you want to do so in as simple a way as possible. How do you make that happen?

The first step is to automate your savings. You can do this using an app like Acorns, which rounds your purchases up to the next dollar, and invests the money (quite simply) into the stock market. You might also try Qapital or Digit, each of which helps you save and invest without much effort.

Over time, saving and investing in this fashion helps you to consistently build wealth. You can also invest your savings in the stock market, or real estate. Apps like Wealthfront and Betterment make it easier than ever to invest without hassle. 

You can also work to buy rental income properties in your local area, or use platforms like Fundrise to invest in commercial real estate through preselected deals. Each of these vehicles allows you to build wealth consistently. Remember, the money you’re investing is your savings, thanks to your strong credit score.

The Final Word

A strong credit score means not only peace of mind, but also, saving money. This money can be used to invest and build wealth, which ultimately allows you to live better.

When you have poor credit, it can feel like you don’t have options. However, that’s not true. There are many ways to improve your credit score. Be patient with yourself, but stay focused. 

Given time and effort, you’ll get there. We’re rooting for you.