Your credit score isn’t just another set of digits
Your credit score is a vital indicator of your financial habits that lenders rely on to determine whether they’ll lend you money – and if so, at what rates and terms.
Why? The lower your score, the greater the risk that you won’t repay the borrowed funds in full and on time. When lenders see a less-than-stellar score, they might decide the risk is too great and turn down the loan. Or they might compensate for the risk by charging a higher interest rate.
This means that major life goals like buying a car and becoming a homeowner can hinge on your credit score, as can the health of your monthly budget.
Here are two examples of how your credit score can affect your financing options and costs. Note: these numbers are just for illustrative purposes, as loan rates and terms depend on a variety of factors.
Example 1: Buying a Car
- Cameron has a credit score of 570 (Poor), and he’s unable to find a bank willing to extend him an auto loan. He’ll probably need to find a cosigner with better credit or save up until he can buy a car with cash. He might be tempted to go to a “buy-here-pay-here” dealership that offers financing with no credit check, but he should proceed with caution since many of those places charge exorbitant interest rates and fees.
- Camille has a credit score of 660 (Fair), and she gets approved for a 72-month auto loan in the amount of $40,000 at an interest rate of 9%. Her monthly payments will be $721, and she will pay a total of $51,914 over the course of the loan.
- Caleb has a credit score of 810 (Excellent), and he gets approved for a 72-month auto loan for $40,000 at 5%. His monthly payments will be $644 ($77 less than Camille’s), and he will pay a total of $46,382 over the course of the loan ($5,532 less than Camille will).
Example 2: Buying a House
- Hannah has a credit score of 610 (Fair), which might be sufficient to secure an auto or personal loan but isn’t quite high enough to qualify for a conventional mortgage. She might be able to take advantage of a special government-backed program designed for homebuyers with lower income and limited credit. Or she might just have to wait until her financial picture improves.
- Hans has a credit score of 680 (Good), which allows him to qualify for a conventional 30-year mortgage in the amount of $300,000 at a fixed rate of 8%. His monthly mortgage payment will be $2,201, and he will pay a total of $792,466 over the course of the loan.
- Hayley has a credit score of 800 (Excellent), which gives her access to the most favorable rates and terms. She secures a 30-year mortgage for $300,000 at 7%. Her monthly payment will be $1,996 ($205 less than Hans’s), and she will pay a total of $718,527 over the course of the loan ($73,939 less than Hans will).
As you can see, a relatively modest boost in your credit score can potentially save you hundreds every month and tens of thousands over your lifetime. So, how can you enhance your credit and your overall financial well-being? Read on.
6 Ways to Increase Your Credit Score
Your credit score depends on several variables, which means there are several ways you can improve it. Here are some actionable tips:
- Commit to paying all your bills in full and on time. This is the single most important thing you can do to boost your score.
- Aim to keep your credit utilization ratio under 30%. Creditors like to see that you can use revolving credit without maxing it out.
- Limit the number of credit cards you apply for. These applications result in hard inquiries that temporarily ding your score.
- Keep older credit cards and lines of credit open. The length of your credit history is another important factor that goes into your score.
- Regularly check your credit report for errors or fraud. You’re entitled to one free credit report a year – and it’s always worth a look.
- Consider opening a secured credit card. The Amegy Bank Launch Secured Visa® Credit Card can help you build or rebuild your credit.
Any Questions?
Since 1990, Amegy Bank has been a bank for Texans, built by Texans. For personalized guidance on borrowing, building credit, and other financial goals, schedule an appointment at a branch near you.