Improved Credit = Massive Savings

According to a recent consumer credit score survey commissioned by the Consumer Federation of America, consumers could save sixteen billion dollars a year in lower credit card finance charges alone, if they were to improve their credit scores by an average of only 30 points. 

The survey says that compared to last year, consumers better understand credit scores and enjoy improved access to their information.  However, the conclusion is that these developments alone are insufficient. Unfortunately, most consumers still do not know basic facts about credit scoring and their overall financial significance.

Now that so many businesses, not just creditors, use credit scores in product pricing and availability, the implications of low scores (and savings from high scores) can be considerable.  

Consumers can easily improve their credit scores by:

• Paying their bills consistently and on time.

• Not maxing out their credit cards or other revolving credit.

• Paying off debt, rather than simply moving it around

• Avoid opening a number of new accounts in a relatively short time.

• Checking their credit reports to make sure they are error-free (most are not).

The survey shows that many consumers simply do not understand how costly lower credit scores truly can be.  In terms of mortgages, on a $150,000 30-year fixed-rate mortgage, consumers with credit scores over 760 will be charged a 5.42% rate with monthly payments of $844, while consumers with credit scores below 620 will have to accept a 7% rate with monthly payments of $998 (if in fact they are able to qualify for the loan). That's an annual difference of $1,848!  Vehicle loans are no different, and the difference in interest rates are significantly different.

High score borrowers will invariably qualify for the 0% or 3.99% rates, while borrowers with poor credit will never qualify for low rates.  Many borrowers with poor credit may be expected to pay 12%, 15%, 18%, or more for the same vehicle over the same four or five year term.  Do the math!  In fact, I have seen a number of borrowers with 24% to 28% interest rates, which disqualified them from securing a home loan.

Low credit scores might not only cost consumers thousands of dollars a year in additional finance charges, but low scores might also deny them access to credit, insurance, phone service, the ability to rent an apartment, or even a job.

Consumers with scores below 600 are usually charged relatively high "sub-prime" loan rates (I prefer to use the less demeaning term "Non-conforming").  At the same time, those with scores above 700 are usually granted relatively low "prime" rates (I prefer to use the term "conforming".)