How Credit Affects Your Budget
Ever wonder how your credit score can affect your monthly loan payments?
For better or worse, your credit can have a direct impact on your budget. We all know that lower credit scores mean higher interest rates, higher payments and more total interest paid over the life of a loan. On the other hand, better scores mean lower interest rates and payments, saving you money every month.
But just how much of a difference can improving your credit make?
To illustrate, let’s use the example of a new car purchase. Let’s say the loan size is $20,000 with a repayment term of 60 months (5 years). We took a sampling of interest rate offers available from banks and other lenders based on credit rating and score, and below is what we found.
Take a look:
*Note – We included 29.99% as an interest rate because this is the legal limit a lender can charge. This is a real interest rate for some and we have come across a number of clients who have had this rate. Further, while it is also possible to get special financing rates for new vehicles through dealerships such as 0.0% or 0.9%, this is less common so this was not included.
As you can see, your credit score can have a very large impact on your monthly payments, which directly influences your long-term financial health. This is especially true when your credit score falls below the “Fair” category – the lower your score, the more you will pay (literally).
Now imagine you improved your credit score by one category. The difference between Poor and Fair is striking – by moving up one category, you save $31.16 per month and $1,869.71 in total interest over the life of the loan. By moving from Fair to Good, you save $20.73 per month, and $1,243.91 in total interest. Not too bad!
To take a look at how your own credit can impact interest rates on car loans or home purchases, a great tool is the My FICO Loan Savings Calculator.
Need to build your credit? We can help
At Mercy Corps NW we have services available to get you closer to your credit rating goal.
- Sign up for credit counseling through MCNW to find out where you stand. You’ll get your credit report, view your score and history and get advice from a professional.
- Learn more about how credit works here and see what steps you can take to improve your score.
- Lastly, we also offer small business loans to Foundations and IDA graduates that build your personal credit. For those that have completed our Foundations business course or the IDA program, clients are pre-approved to access an initial $1,000 over 6-12 months. Once repaid, clients are then eligible for an additional loan of $2,500. If more funding is needed, we also offer business loans up to $20,000 for startups and up to $50,000 for existing businesses. All MCNW business loans can build up your credit history.