Your creview score is I amimportant for lenders because it helps they rate you as a credit risk, but that’s important to you too, because this ultimately determines the interest rate you pay on credit cards and loans. OEven though I knew it in my early twenties, the importance I didn’t really understand until I thought about it in terms of pure silver— how much more or less was i spending on interest only, based on my credit rating? Here’s a look at how it might break down for you.
People with higher credit scores pay less interest
Credit ratings are based on how much credit you have, how much of it you actually use and the regularity with which you repay balances due on time. If you are a responsible borrower, a lender will reward you with a higher credit score, which in turn inferior your interest rate.
For credit cards, the average APR in 2020 was 16.28%according to data from Federal Reservebut your rate may be higher or lower based on your credit history. According to the most recent CFPB Consumer Credit Card Market Reportthe average effective interest rate by credit score level looks like this:
- deep subprime (579 or less) = 21%
- Subprime (580 – 619) = 20.5%
- near the first (620 – 659) = 19%
- First (660 – 719) = 16.5%
- Super Premier (720 or more) = 13.5%
(Interest rates vary depending on the type of card you have, as the rates for premium travel cards with benefits tend to be higher than what you would get with a refund card).
A good credit score means less money wasted on interest
Having a rough idea of how much interest is charged for each level of credit score will then tell you how much the money you would have to pass on interest if your score has deteriorated or improved. Let’s say you’re a borrower with $10,000 in debt and you plan to pay it off evenly over 36 months. Using a loan calculatorhere’s how the total interest charges would add up:
- deep subprime (579 or less) = $3,560
- Subprime (580 – 619) = $3,473
- near the first (620 – 659) = $3,191
- First (660 – 719) = $2,746
- Super Premier (720 or more) = $2,220
With a super bonus score, you will save $1,340 on interest payments relative to the lower level, to repay the same amount of debt with the same repayment schedule. And that’s just one example: if you think about the life of your credit card, the savings from a high credit score can really add up.
How to increase your credit score
Of course, not all of us are lucky enough to have sparkling wine super premium credit scores, but there are no-cost ways to improve the score you To do have-this Lifehacker post is a good place to start. Ppersonally, knowing how pure the money I save on interest makes the rates I’m charged Following real somehow motivate me to get my credit score as high as possible. In turn, that also made me more disciplined when it comes to using my credit in general – a win/win.
