Increasing Credit Score Can Result in Huge Savings in Credit Card Interest
According to a new study from LendingTree, raising your credit score could save you thousands of dollars in interest payments. Based on national average balances and APRs, a person with fair credit spends $5,629 more in credit card interest than someone with ‘very good’ credit.
LendingTree based its figures on a few assumptions:
- Borrowers are only making the minimum monthly payments on their credit cards
- A fair credit score is between 580 and 669
- A very good credit score is between 740 and 799
- Average credit card debt is $5,265
Based on their evaluation, a person with fair credit carries a credit card APR of 24.49%. That is significantly more than the 14.49% for someone with very good credit. There were also large differences in personal loan interest rates: 30.27% compared to 12.07%. Other debt categories had a lower APR difference, but fair credit borrowers still paid thousands of dollars more over the course of the loan.
How to Break the Cycle
If you are in the fair credit category, don’t be distraught. There are ways to improve your credit score or avoid extensive interest payments:
- Pay more than the monthly minimum. People with ‘very good’ credit in the LendingTree study still paid $9,059 on a $5,265 credit card bill just by paying the monthly minimums. If you can pay off the debt entirely, do so. If not, put as much money as possible toward your credit card debt each month to lower your interest payments.
- Only take out what you can logically repay. This applies to credit cards, personal loans, mortgages, and more. If you live below your means and pay your debts off quickly, you have more disposable income to put toward future purchases.
- Make your monthly payments on time. This will keep your credit score up and may push you into the next tier. If you do this consistently, you may qualify for a lower interest rate within the year.
- Use less than 30% of your available credit. This is the threshold that keeps your credit score high. If you have $1,000 available on a credit card, maintain a balance lower than $300.
- Refinance for lower interest but not a longer term. If you have the opportunity to refinance your car, home or other lengthy loan, be careful. It’s worth getting a lower interest rate, but only if the loan term stays the same. If the payments are extended for another year, the lower interest may not pay off in the end.