Around 11 million credit scores across the country are rising because of a new change to credit histories.
Credit scoring models – those complex mathematical webs of stats and algorithms – will no longer count your civil judgments or tax liens against you.
Experts say these changes will result in some scores jumping as high as 20 points. The average increase should fall somewhere between 10 and 20 points, data experts LexisNexis say.
What’s all this jargon mean for you? Well, in simple terms it means that the credit score changes coming on July 1st will save you thousands of dollars.
Crazy, right? How could a change of 10 or 20 points result in a savings of thousands of dollars? Well, that has a lot to do with how your credit scores affect the interest rates you get from lenders.
Lenders, the financial institutions who give you money, fall into three categories for most consumers: credit cards, auto loans and mortgages.
Consider what you’re going to read in this article as a guide on what to do with your new increased credit scores. We’ve researched how a change of 10-20 points can affect the type of credit card you get and we’ve also crunched the numbers to see how your better scores will get you better rates.
And, when you get better rates, you save more money.
How Your Credit Score Increase Will Affect the Credit Cards You Get
A jump in your credit scores is like leveling up in a video game. You get access to better equipment – in this case, credit cards – that help you along your journey.
When your scores rise 10-20 points, there’s a good chance that you’ll move from one credit tier to the next and, when you do that, you have the chance to add better credit cards to your financial arsenal.
You see, credit card companies judge you buy your credit scores. The lower the scores, the less reliable you are and the worse deals you’ll get on credit card interest rates and benefits.
As your scores go up, you’ll get offers for better cards with lower APR’s and more significant rewards programs. Not only that, but you’ll most likely see your credit limit go up.
But let’s move this discussion from theoretical to real life. You may see your credit scores rise from bad to fair, which means you’ll get access to a whole new type of credit cards.
Here’s a table that shows the differences between credit cards for people with bad credit and credit cards for people with fair credit:
|Total Visa (Bad)||Credit One Platinum (Bad)||Build Card (Bad)||Southwest Rapid Rewards Plus (Fair)||QuicksilverOne (Fair)||Capital One Platinum (Fair)|
|Annual fee||$48/year & $6.25/month||$0-$99||$72||$69||None||None|
|Credit limit||$300||Up to $1,500||$200/$500||Not known, but most likely up to $5,000||Up to $1,500||Up to $1,500|
|Rewards rate||None||1.1:1 on dining, 1:1 on everything else||None||2:1 on Southwest.com, 1:1 on everything else||1.5%||None|
|Intro bonus||None||None||None||60,000 points||None||None|
To get an idea of how much of a difference there is between credit cards for bad credit and credit cards for fair credit, we’ve taken the data from the table above and run some averages:
|Credit cards for bad credit||Credit cards for fair credit||Difference between the two|
|Avg. highest APR||28.18%||24.57%||3.61%|
|Avg. highest annual fee||$98||$23||$75|
|Avg. processing fee||$47||$0||$47|
|Avg. highest credit limit||$766||$1,500||$734|
So, as you can see, being able to get a credit card with fair credit scores and not bad scores can save you a lot of money in fees and give you a higher credit limit.
Now, keep in mind that we’re only taking into account three cards from each category. There are dozens more out there. However, we’re using these cards to show you how much of a rate and fee difference there is between cards for bad credit and cards for fair credit.
Better Credit Scores Leads to More Valuable Rewards Programs
Aside from rates and fees, we’ve noticed that credit cards for people with fair credit tend to offer more opportunities to earn frequent flyer or cash back rewards points. You might be wondering why that’s the case.
Well, when you have bad credit scores, banks see you as a risk. They’re worried you are going to eventually flake out and not pay your card, which causes headaches for them.
So, to hedge their bets, they make you pay more fees up front and don’t give you anything for free. The Credit One Platinum’s cash-back rewards are the exception, not the rule.
However, the stats show that consumers with fair credit scores are less likely to make payments more than 30 days late (“delinquency”). Since you’re less risky, the credit card company is more willing to offer you lower rates and fees as well as access to better rewards programs.
The QuicksilverOne is a good example of this. The card’s 1.5% cash back rate is something you’ll only see for fair-credit cards and not bad-credit cards.
Another good example of this is the Southwest Rapid Rewards Plus card. You won’t find any airline rewards cards in the bad-credit world, but you will when you get fair credit.
Virgin America and Frontier Airlines offer credit cards for people with fair credit, but the rewards on those cards are often far less than what you’d get with the Southwest Rapid Rewards Plus.
How Better Credit Scores Save Money on Credit Card Interest Payments
The last thing we want to talk about in this section on credit cards is the amount of money you can save when you jump from a card for people with bad credit to a card for people with fair credit.
We’re going to compare the Build Card to the QuicksilverOne and we’re going to assume that you carry a $500 balance on both cards every month.
If it takes you one year to pay off your $500 Build Card balance, you’ll end up paying $84.63 in interest with the Build Card and $70.24 with the QuicksilverOne. The difference? About $14.
But now think about this from a monthly perspective. You see, the Build Card charges interest on your transactions as soon as you make them, whereas the QuicksilverOne won’t charge interest if you pay off your balance in full every month.
Without making things too complicated, let’s say you spend $125 a week with your build card. Your interest for a month’s worth of purchases will be $7.60 a month if you pay off your balance each month. The twelve-month total? $91.20.
If you pay off your balance in full every month on the QuicksilverOne, you won’t pay any interest. But that’s not all. The 1.5% rewards rate means that you’ll earn $7.50 a month on your $500 of purchases, or $90 a year.
These two cards are the perfect example of the advantages of fair credit. The Build charges you $91.20 a year for while the QuicksilverOne pays you $90 a year.
How Your Credit Score Increase Will Affect the Auto Loans You Get
In these next two sections we’re going to move beyond credit cards to bigger financial products that can cost you more money over time: auto loans and mortgages.
According to CNET, the average price of a new car in 2016 was around $34,000. How much of a difference in interest is there when you’ve got fair credit as opposed to bad credit?
We used FICO’s interest calculator to answer that question. Their calculator estimates the interest rate you’ll pay over the life of your loan based on your score:
|Bad credit (500-589)||Fair credit (590-619)||Fair credit (620-659)|
|Interest paid after 48 months||$11,564||$10,605||$7,127|
|Interest paid after 60 months||$14,778||$13,552||$9,077|
You may not believe it, but simply by having your credit score increase from 610 to 630, you could save $3,478 in interest payments on a 48-month auto loan and $4,475 on a 60-month auto loan.
Now, we know that it isn’t just people with poor and fair credit who will see their scores jump.
Consumers with good and excellent credit could get a boost, too, but we’re highlighting the lower tiers because that’s where a score jump makes the biggest difference.
The question, of course, is why that is. It goes back to what we briefly touched on in the credit card section: late-payment risk, also known as “delinquency”.
According to Experian, delinquency rates for the various credit-score tiers are as follows:
- Excellent (800+): 1%
- Very good (740-799): 2%
- Good (670-799): 8%
- Fair (580-669): 28%
- Bad (579 and lower): 61%
Since there’s such a huge jump in delinquency chances from Good to Fair and from Fair to Bad, there’s also a big jump in your interest rates.
It might seem unfair, but it’s the banks way of protecting themselves just in case you are seriously late on a payment or just don’t pay at all.
How Your Credit Score Increase Will Affect the Mortgages You Get
So, credit cards were our first area of focus and auto loans were our second. Even though neither of those products involves as much money as a mortgage, you can still save a ton of money on them if you move from bad credit scores to fair credit scores.
The savings you get from seeing your scores rise 10-20 points are even more amazing when you start talking about mortgages. While your car loan may last five years, your mortgage lasts 30, so any difference in interest rates is compounded for three decades.
To give you an idea of how much of a difference your new scores can make, we’ve made another chart based on FICO’s interest calculator tool. In this chart, we’re using a 30-year fixed-rate mortgage. We’re also using the U.S. Census’ average home price of $372,500 to calculate total interest payments.
You’ll notice that the credit scores start at 620 – that’s because it’s tough to get approved for a mortgage with scores below 620:
|Fair credit (620-639)||Fair credit (640-659)||Fair credit (660-679)|
|Interest paid on a 30-year mortgage||$360,217||$315,758||$281,708|
So, first observation: You could be eligible for a mortgage if your scores rose above 620! That’s amazing news, but it comes with a little bit of reality. You’ll only be eligible for certain loans, the most popular of which is the FHA loan.
If you want to use your new score to get an FHA loan, remember that, among other things, you’ll need to put at least 3.5% down.
Okay, back to the chart. The numbers here are pretty staggering. The difference in interest between lower fair scores and mid-range fair scores is $44,459 and the difference between mid-range fair scores and high-range fair credit scores is $34,050.
Pro tip: Just because your scores went up isn’t a guarantee that you’ll get a mortgage. Home loans are a really complex product that takes into account a lot of factors related to your financial life.
A Summary of How Much Your Increased Credit Scores Could Save You
We’ve gone over a lot of numbers in the past few minutes and it could be a little confusing. So, we’re going to boil it down to one number: $37,709.
That’s how much you can save because of your increased credit scores. Obviously, that number will change depending on which credit card you choose and how much your car and home cost.
You’ve got a great opportunity here – your scores are going up without having to do anything. Your increased scores give you increased power to negotiate loans and credit that works in your favor far more than it did when you had bad credit scores.
How to Use Your New Score to Your Advantage
With this new power, it’s important to practice discipline. Use your new scores strategically. Only get credit when you need it. Take time to research which credit cards are best for you.
Do comparison shopping when you’re buying a car to make sure you’re getting the best rates you can. Another bonus – you should see your car insurance rates go down a bit now that you’ve got a higher score.
When it comes to getting a mortgage, talk with several different lenders about mortgage options. Fill out applications with at least three or four lenders to get a sense of what they can offer and which fees they charge.
These types of habits are the hallmarks of wise consumers and they can help leverage your new scores for big savings.
If you feel like you don’t have all the tools you need to successfully use your scores in your favor, we’ve got some great articles to help you.
We wrote an excellent credit score guide and, by reading it, you can get an all-around understanding of what’s going on with your scores and how you can make them better.
We’ve also published a good article on the changes to credit reporting that increased scores. We talked with lenders and credit experts to help you understand the full meaning of the changes: what they are, why judgments and liens are being removed and what it means for you.
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