How Much Can You Save By Improving Your Credit?
April 23, 2019Once you understand all the things that go into computing your credit score and take steps to improve it, what does that really mean to you monetarily? Is it really worth doing all that credit management stuff?
Life can be short and uncertain, and we all have great experiences we want to enjoy while we can. As someone with many hobbies and interests (and a healthy credit score), I get it. But why make it so expensive by leveraging our financial futures? There are better (and cheaper) ways.
Iffy credit is expensive
Imagine if every day when you wake up and venture outside, you find $3. Every single day for the foreseeable future. You’d be pretty happy, right? Maybe not ecstatic, but three bucks is three bucks. What if you found $9 every day? How about $20? That’s between $1,000 and $7,200 in “found” money each year. Who wouldn’t like that?
Unfortunately, instead of finding these extra dollars each day many of us are needlessly donating (think “losing”) those dollars to interest paid on consumer debt (aka credit cards, payday loans, etc). And the worse your credit score happens to be, the more money you are giving away.
OK, but where do those number come from?
That $3 you could be finding each day? You are giving that away to the bank if you financed a loan with an “okay” credit score rather than an excellent score. If you are carrying credit card balances at high interest rates, you might be giving away another $9 per day, and your $20/day donation is likely going to your mortgage lender.
Let’s go shopping for a $10,000 personal loan payable over five years and compare to see just how expensive bad credit can be:
| Credit Rating | Interest Rate | Monthly Payment | Total Interest | Cost of Bad Credit |
| Excellent (720 – 850) | 13.9% | $232 | $3,920 | $0 |
| Good (690-719) | 18.0% | $254 | $5,240 | $1,320 |
| Fair (630-689) | 21.8% | $275 | $6,500 | $2,580 |
| Bad (350-629) | 27.2% | $307 | $8,420 | $4,500 |
The relatively small differences between monthly payments for each credit rating can be deceptive. With multiple lines of credit, these small amounts add up to big amounts and become the answer to the common question, “Where did all of my paycheck go?” If you want a real eye-opener, take a look at Credit.com’s lifetime debt calculator. Bad credit can end up costing you more than $200,000 in additional interest payments over your lifetime!
Start finding extra money now
Although a debt-free lifestyle is an admirable goal (and many people do achieve it!), modern life can make it challenging to get there. Along the way, however, there are plenty of steps we can take to reduce the interest bite, even if living debt-free is still a distant dream:
- Review your current credit score using free sites such as Credit Karma or Credit Sesame. Looking at your own score will not damage your score, and you need to know where you stand in order to make improvements.
- Complete the Debt Inventory Worksheet. Take a serious look at all of your loan balances and how much you are paying on them each month, including the interest rate.
- Use a Debt Blaster Calculator or similar to see how making extra payments on your highest interest rate debt can help you pay off all of your debts even faster – and put those interest dollars back into your pocket.
- As your credit score improves over time, contact your lenders and negotiate a lower interest rate while you continue to aggressively pay down balances.
- Look for low-or-no-interest rate credit card balance transfer offers.
Committing to a debt makeover starts with having a plan. As you execute your plan and begin to accelerate debt payments, you get close and closer to a debt-free lifestyle, or at least a reduced-debt lifestyle. That can mean having several thousand “extra” dollars in our pocket each year and less stress and anxiety over those pesky loan payments.