Does Your Credit Score Matter?

Imagine two people, not unlike ourselves, moving into a new town for work. They’ve been asked to help head up a new branch that their employer is opening up. They hold identical positions, work the same hours, receive the same salary, and have become good friends over the past few years. A mutual contact puts them in touch with a realtor who knows the area well, and after looking around, the two friends end up wanting identical designer homes in the same cul-de-sac.

Both friends are in their late twenties, both are hoping to start a family within the next couple of years, and both are excited about the new job and the prospect of a new house.

In fact, the only real difference between them is that one is more “into finances”. He keeps track of the money he has coming in and the money he has going out, understands the importance of saving and investing, and knows a little bit about credit score. Despite spending more than he knows he should have on cars and partying in his early twenties, he’s done well with what he’s earned since then and rarely, if ever, misses a payment on anything.

The second guy is just as smart as the first, but doesn’t think or worry too much about money. Growing up, nobody took the time to explain to him why personal finances are important, he wasn’t a fan of math, and he associated budgeting with not being able to spend money. None of this is really his fault, but it is his problem. Despite making the same amount as his friend, he occasionally misses credit card payments and typically only pays the minimum amount. Also, due to an issue with billing and contact information at his last apartment, he recently had some debt in collections from an overdue electricity bill which he recently paid off.

As a result of their respective financial habits and education, the first friend has an excellent credit score of 760. This first, on the other hand, sits at a 635 as he prepares to move and start his new job.

To get the house they’re both looking at, both of the friends need to mortgage $300,000. They each apply and get pre-approved for a 30 year fixed mortgage with an APR right on par with the national average according to their credit score. After pre-approval, both quickly put in an offer at asking price, both offers are accepted, and both guys close according to schedule. Happy with their new homes and excited about work, they move and get settled in. Before long, they each get the bill for their first month’s mortgage in the mail. 

What’s the payment for our guy with the lower credit score? Just north of $1,450. What about the one with a “Very Good” credit score? About $1200. Two friends, living on the same cul-de-sac, in two houses that are exactly alike, with the same salary, have mortgage payments that are different by $250. Over the life of the mortgage, that’s a grand total of about $95K.

Credit ScoreAPRMonthly PaymentTotal Cost
$300,000/30 yr. fixed Mortgage Rates and Payments according to data from FICO

One Year Later

A year passes, and the two friends are now looking at buying identical new cars. They’ve each got $15,000 saved and want to finance another $25,000. Again, each applies for a loan and gets a rate on par with the national average according to their credit score. What’s the monthly difference this time? About $50. Not as bad as the house, but the guy with the lower credit score is paying about $2,700 more for the same car, even after putting $15,000 down. On top of that, over the course of the past year, he’s paid an additional $3,100 for the same house as his friend.

Credit ScoreAPRMonthly PaymentTotal Cost of Loan
$25,000/60 mo. Auto Loan Payments according to data from Experian

Here’s what that brings these two guys to each month:

Credit ScoreMortgageAuto LoanTotal
Monthly Payments by Credit Score

It Only Continues…

So far we’ve only discussed mortgages and auto loans. A good credit score can also lower rates and premiums for home and auto insurance, provide access to credit cards that have truly worthwhile rewards (especially if you’re in the military and get the annual fees waived), enable refinancing currently held loans at lower rates, and even get you out of having to pay deposits for necessary expenses like cell phones, gas, water, and power. Bad credit does the opposite: larger premiums, higher rates, less access to credit cards, and expensive security deposits. Click below to learn what the first guy knows.

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