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Whether it is a good thing or not, we live in a society where credit is generally available. And one’s credit score is very important it can affect one’s finances a lot (especially when we talk about the interest cost in a mortgage, auto loan or even a business loan). In this post, I would like to crunch the numbers in greater detail.
The most glaring benefits when you have good credit comes when you take on a mortgage. Let’s look at two examples here. We’ll use the example of someone taking out a $200,000 mortgage. It will be a simple 30yr fixed conventional mortgage. We’ll use the example of someone having a rate of 5% and someone else having a rate of 6%.
The person who has a mortgage rate of 5% on his 30 year mortgage will end up paying a total of $186,511.57 in total interest cost over a 30 year period. His or her monthly mortgage will be $1073.64.
The person who has a mortgage rate of 6% on his or her 30 year mortgage will end up paying a total of $231,676.38 in total interest cost over a 30 year period. The monthly payment will be $1199.10.
If you look at the monthly interest, the difference is only about $127. But the total difference in interest cost over 30 years is about $45,000! Imagine if your credit is bad and the rate you are given is 2% points over someone with a great credit! The difference is the interest payment is huge.
Let’s use another example on auto loans. Assume someone buys a car for $30,000 and decides to finance it. One is charged a 4% interest rate. Another person is charged 8% interest because his or her credit score is not so good. Let’s assume we take a 5 year loan.
The person who has a 4% interest rate will be paying $552.50 a month. Over a 5 year period, the total interest cost is $3149.74.
The person who has the 8% interest rate will be paying $608.29 a month and over a 5 year period, the total interest will amount to $6497.51
The math is pretty easy. If you have bad credit, the rate you pay on an auto loan is likely to be double the rate of someone who has great credit and the interest cost you have to pay is so much more.
Your credit score and standing will also affect the type of credit that is available to you. If you have excellent credit, then you can have pick of card you want. Credits cards for excellent credit folks generally offer the best features, both rewards and rebates. If you credit is excellent, chances are that you will be instantly approved when you apply for a credit card.
In contrast, a person with bad credit (who needs a credit card) has to apply for bad credit credit cards. These cards have higher fees (even annual fees) and higher interest rates. And it will take a while before you can get a regular no annual fee credit card.
Unless you intend to pay cash for your home, your credit score is something you have to work on before you apply for a mortgage (or an auto loan for that matter). Make sure you pay your bills on time and that there is no negative marks on your credit report. Having a great credit score will save you lots of money on your mortgage interest down the road.