If you're considering taking out any type of loan, you should be monitoring your credit score.
The better your credit score, the better interest rate you can get on all types of loans, says Ted Rossman, a credit industry analyst for CreditCards.com. Lenders use your score to gauge your creditworthiness, or how likely you may be to pay back what you owe. That affects whether you get a loan in the first place and what kind of interest rate you're offered.
"A good credit score can save you a ton of money in the long run," says Rossman. "Besides your net worth, your credit score is probably the most important number in your financial life [and] your credit score has a major effect on your net worth."
There are different scoring models and ranges for credit scores, but most lenders use FICO scores, which range from 300 to 850. Different loans have different qualifying credit scores, but to nab any lender's best rate, you'll generally need at least a score in the 700s, which falls in the middle of the "good" range in FICO's scoring model.
Here's what score to aim for to get a lender's best rates on different kinds of loans.
Most auto lenders use FICO's auto score, which looks specifically at your creditworthiness for car loans. It uses a wider scoring range of 250-900. If your credit score is 720 or higher on that scale, you'll qualify for the best super-prime (excellent) rate for a car loan, says credit expert Gerri Detweiler.
For example, if your score is 700, or "good," you can qualify for 6% on $29,620 loan (the average new car loan amount) paid over 60 months with a monthly payment of $572 and $4,701 in interest. But if your FICO score is 720 or above, you can qualify for 4.6% on a new car with a lower monthly payment of $554, saving you $18 each month and $1,078 over the life of the loan.
About half, 49%, of Americans with a credit card have a cash-back card, making it the most popular type of rewards card. A credit score of 740 or above gives you a "slam dunk" chance to qualify for a top cash-back rewards card, says Rossman.
If your credit score is 650 or lower, however, you can still be approved for a cash-back rewards card like the Apple card, for instance, but your credit limit may be lower and your interest rate may be higher, says credit expert John Ulzheimer, who has worked for FICO and Equifax.
To make cash-back cards worthwhile, you have to pay your bills in full and avoid interest rates, adds Rossman. For example, if your credit score is 650 and you put $1,000 on a cash-back card with a high interest rate of 20% without paying off the balance immediately, you'd pay $200 in interest. Even if you have 2% cash-back savings on that card — so, a savings of $20 on $1,000 worth of purchases — you'd end up $180 behind.
When you're borrowing federal direct student loans as an undergraduate, your credit score doesn't matter. But if you need to take out private student loans, as about 14% of undergraduates do, lenders look at your credit score and credit history.
You'll need a credit score of at least 750 to get the best rate on a private student loan, says Betsy Mayotte, president of The Institute of Student Loan Advisors. That's currently about 3%. You may still be able to qualify for a loan with a score as low as 650, but your interest rate will be much higher — in the range of 8% or 9%, and it can go as high as 14%.
Unlike other types of loans, mortgage lenders pull three reports, ending up with what's referred to as a tri-merge credit report from Equifax, Experian, or TransUnion, says Ulzheimer. For the most part, lenders tend to go with your middle score of the three, meaning you'll need a score of 760 or better at two of the three to nab the best rate of 3.32%.
Let's say for example your credit score is 759. You'd qualify for a 3.54% rate on a 30-year fixed loan of $216,000, according to FICO's loan savings calculator. Your monthly mortgage payment would be $975, and you'd pay about $135,000 in interest over the life of the loan.
But if your credit score is 760 and you apply for the same loan amount, you'd qualify for the best rate of 3.32%, making your monthly mortgage payment $949 ($26 less). You'd pay just over $125,500 in interest over the life of the loan.
That means a one point increase in your credit score can save you about $9,500 in interest.
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