A credit score is an important aspect of all your loan approvals. Your credit score reflects the likelihood of the loan being repaid on time. The higher your credit score, the easier it is for you to get a loan. You should try to maintain a healthy credit score. The current article discusses how an improved credit score helps you to save on interest payments. It also provides insights into how to improve your credit score and what to do if your credit score has improved after taking a loan.
How Improved Credit Score Helps in Savings
A credit score is the first thing lenders will study in their loan appraisal process. A higher credit score represents higher creditworthiness and better potential loan repayment capability. It is estimated that if you have a credit score of 700, you can take a 30-year fixed mortgage at nearly 4.30%. You will pay an interest of $273,834 over the mortgage tenure. If you improve your credit score to 760, your interest rate may go down to 4.05% and you would pay $257,515 as interest. This would result in savings of $16,319 as interest repayment. Similarly, raising your credit score from the fair category (580-669) to a very good category (740-799) can result in even more savings.
You may have different types of loans like home loans, car loans, credit cards, student mortgage, etc. A higher credit score provides you opportunities to get credit at competitive rates for each of these loan types. You can use these savings for investment and enjoy the power of compounding as your investments grow into something substantial.
How to Improve Your Credit Score
Improving your credit score is not as difficult as it may seem. You can ensure the following for improving your credit score:
- Always pay your loan EMIs and credit card bills on time. It is taken positively by the lenders and is indicative of your future loan repayment behavior. Delaying or defaulting on the payment negatively impacts your credit score.
- Keep your credit utilization ratio of less than 30%. If your credit card has a limit of $5,000, then you should try not to use more than 30% of this limit. It indicates that you have not maxed your credit cards and are likely to manage credit responsibly.
- You should not apply for a new credit card just to increase your credit limit. Applying for a new credit card will result in a hard inquiry on your credit report, which may lower the overall credit score. Apply for a new credit card only if it is absolutely necessary.
- Don’t close unused credit cards especially if you have been using them for long. Closing unused credit cards will increase your credit utilization ratio. It will also affect the positive credit history associated with the card.
What to Do if Your Credit Score Has Improved After Taking the Loan
You may have applied for a loan with a lower credit score. Your credit score may have improved after your loan got approved. In such a situation, you would have missed out on competitive credit and would have likely taken the loan at higher interest rates. You can look to refinance your loan for getting a better deal. There are lenders who can consider refinancing your loans if your credit score has improved considerably. Refinancing the loan should be done at the earliest as you have to pay the highest interest in the first few years of the loan. You can also consider getting a personal loan at a lower interest rate to consolidate your debt.
This will help to reduce your cost of borrowing and take advantage of competitive credit due to your improved credit score.