Do you think your credit is good enough? Lisa thought hers was. Her credit score was good, a 690, and shed never had a problem getting a credit card. Getting a car loan for the car she bought last year was pretty simple, too. Even obtaining the mortgage financing for the home she recently purchased was not difficult. What Lisa didnt realize, though, was that good credit doesnt get you the best interest rates. For the most competitive rates on things like mortgages, car loans, credit cards, and even insurance, you need outstanding credit. Heres why. The difference in the interest rate on a mortgage for someone with good credit like Lisas, a 690 FICO score, and someone with outstanding credit, a 720 FICO score, is usually .25% or more. On a $200,000 mortgage, that is at least $500 extra each year for the borrower with good credit. Furthermore, the difference in the interest rate between good credit and outstanding credit on a car loan is anywhere from 1 - 2%. That means for a typical car loan of 5 years, a person with good credit may pay as much as $1,000 more than someone with outstanding credit. Lets look more closely at Lisas situation and how things could have been different if she would have improved her credit score by just 30 points before obtaining her mortgage. One option Lisa would then have is to use the money she was paying in extra interest each month toward paying down her credit card debt instead. This means that she could have paid off an additional $500 of debt each year without having to take any further actions whatsoever. Better yet, Lisa could instead opt to make $500 in extra principal payments toward her mortgage each year. This would result in her mortgage being paid off 33 months earlier, thereby saving her more than $42,800 over the life of the loan! (Based on a $200K mortgage with a 30 year fixed interest rate of 6.75%.) Keep in mind, these two examples are just from the savings on the mortgage interest rate. Imagine the other financial goals she would be able to reach sooner as a result of any savings from lower rates on her car loan and credit cards. By paying more on interest rates due to having only good credit, Lisa was losing out on opportunities for debt reduction and increased savings potential. For most people, these lost opportunities mean less freedom and delayed plans when it comes to long term goals. Think about it. How many times have you put off travel, investments, or even the launch of a business idea because of too much debt or lack of savings? Thats the problem with good credit. It will enable you to qualify for loans and credit cards but it wont position you for the maximum success and choices that come with outstanding credit. Does this mean its too late for Lisa to benefit from credit optimization? The answer is no. Its never too late to get started on boosting your credit power. In Lisas case, an improved credit score will likely mean immediate savings on her credit cards. In addition, if she follows whats typical of many homeowners, she will probably refinance her mortgage within the next two or three years and an improved credit score will save her money on the new mortgage. Finally, Lisa is planning to launch a new business next year. By boosting her credit beforehand, she will be able to qualify for a business loan with more ease and she will receive the best interest rate available. |
