Wednesday, December 21, 2011

Control Your Money - Your Credit Score

If you want to spend less and get more bang for your buck, one of the best things you can do is have a good credit score.  No, it won't make everyday purchases cheaper, but it can put more money in your wallet for those everyday purchases.  You see, having an excellent credit score can save you thousands of dollars.  How?  Here's how it works.

Say you're buying a house or maybe you're looking at refinancing your current home.  The first thing a bank will do is run your credit report.  If you have good credit, you will get a lower interest rate.  If you credit is not good, you will get a higher interest rate.  This is what costs you.

To illustrate, here's an example for a $200,000 mortgage (houses for big families aren't cheap you know):

  • Amount Borrowed: $200,000
  • Interest Rate: 8% (this is for a poor credit score)
  • Monthly Payment: $1,467.53
  • Interest Paid (over 30 years):  $328,310.29
  • Total Amount Paid (over 30 years):  $528,310.49
Wow, those numbers are just plain ugly!  If you borrow $200,000 at 8% interest, it will cost you $328,310.29 over 30 years.  That's more than $10,000 per year and that's just the interest!  That's right, you still have to pay off the original $200,000.  This is how banks make so much money!  But what can you do?  You have to live somewhere.

Well, let's look at the numbers again but change the interest rate.  If you have good credit, you will get a better interest rate.  Here's what would happen if you got a 5% interest rate on the same loan:
  • Amount Borrowed:  $200,000
  • Interest Rate:  5% (this is because you have a good credit score)
  • Monthly Payment:  $1,073.64
  • Interest Paid (over 30 years):  $186,511.57
  • Total Amount Paid (over 30 years):  $386,511.57
Is this right?!!!  Yes, it is.  Either that, or is giving me bad data.  But it's not.  If you drop your interest rate from 8% to 5%, it will save you $141,798.72!!!!  Just look at it, it shaves almost $400 off of your monthly payment!


OK, I'm shouting a lot.  I almost feel like one of those shady salesman guys: 
"Just follow's Jeff's simple 7 step get rich quick program and you'll save thousands!  All this can be yours for only $39.99!"  
Everybody wants to save money and a lot of people are trying to find some hidden way to do it.  The truth is far simpler.  Get a good credit score.  Without good credit, you will pay far too much for anything you have to borrow money for.  You will get a far better deal on a car, a house, even on credit cards if you have good credit.

So, how do you get good credit?  I'll save that for another post.

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