What is a credit score? A credit score reflects your credibility with lenders. It is based on your borrowing history, tracked by the three major credit bureaus: Equifax, Experian, and TransUnion, and is updated monthly.
Your credit score is influenced by several factors:
- 35% for payment history (paying bills on time)
- 30% for credit utilization ratio (how much credit you’re using relative to your total credit limit)
- 15% for length of credit history
- 10% for new credit accounts
- 10% for types of credit used
Interest is the cost you pay the lender to finance your purchase. Generally, the higher your credit score, the lower your interest rate. However, a lower credit score typically means a higher interest rate.
Improving your credit score doesn’t happen in a flip of a switch—it can take months or even years. However, focusing on paying your bills on time and maintaining a low credit utilization ratio can significantly help.
Additionally, according to an article by Discover, experts recommend keeping your credit utilization below 30%, and ideally below 10%. For example, if you have a $2,000 credit limit, a utilization rate of 10% means you should not exceed $200 in charges. To maintain a high credit score, avoid maxing out your credit cards and stay within the recommended utilization rates.
Now, let’s explore how different credit scores affect monthly payments using a $20,000 vehicle loan over 48 months:
- Ellie has a 720 credit score and an 8.081% interest rate, resulting in a $489 monthly payment.
- Janet has a 620 credit score and a 12.3% interest rate, leading to a $530 monthly payment.
- Luca has a 520 credit score and an 18.548% interest rate, which results in a $593 monthly payment.
As illustrated, Ellie’s higher credit score saves her $104 per month compared to Luca.
As the saying goes, “time is money.” Waiting to improve your credit score before borrowing could lead to substantial savings.
If you have any questions, please contact your Francis financial planner or reach out to us via phone at 866.232.6457 or email at info@francisway.com.
