How to save $50,000 over your lifetime — and win the battle against inflation

By Andrew Keshner

Equifax, Experian and TransUnion recently announced free weekly credit checks through 2023

Here’s a potential inflation hedge to save money in times of rising costs and interest rates: a rising credit rating.

People with “excellent” credit could avoid nearly $50,000 in additional borrowing costs on a mortgage, credit card, car loan, and personal loan that people with “fair” credit would have to pay.

The nearly $50,000 is an estimate of the additional costs paid over the lifetime of transactions such as a 30-year mortgage, five-year car loan, and three-year personal loan. On a monthly basis, consumers with the higher score could keep $252 — not a meager sum, especially now.

That’s according to new analysis by LendingTree after LendingTree compared the deals lenders offered users in these two credit score ranges in the second quarter.

Credit scores can range from 300 to 850. A “very good” score ranges from 740 to 799, while a “fair” score ranges from 580 to 669. Americans had an average score of 716 in April, unchanged from last year, according to FICO (FICO).

A “fair” credit consumer making minimum payments might pay nearly $18,700 on a $6,600 balance, while a “very good” credit consumer might pay about $15,000 for the same balance.

A $28,000 car loan could cost a consumer with “fair” credit another $2,500 above a “very good” rating, data from LendingTree showed.

Meanwhile, a $315,000 mortgage — at an interest rate higher than 5% — could cost a “fair” borrower more than $40,000 more than a mortgagee with a “very good” credit rating. (Of course, a 5% mortgage seems like a distant hope as mortgage rates are now approaching 7%.)

Credit scores have long been an important number for consumers because they inform lenders’ decisions about interest rates and terms. But household borrowing costs are now in strong focus, and the rumblings of a possible recession will keep household finances in check.

Prices have risen at the highest rates in four decades, most recently in an August inflation report that showed an 8.5% year-on-year rise despite falling gas prices

Interest rates have also risen, driven directly and indirectly by the Federal Reserve’s continued rate hikes aimed at cooling inflation. Last week, the central bank ordered another 75 basis point hike, and Federal Reserve Chair Jerome Powell signaled more to come “until the job is done.”

“It’s a lot more expensive to borrow today than it was six months ago, and it’s likely to get even more expensive in the near future,” said Matt Schulz, LendingTree’s chief credit analyst.

LendingTree estimates that the average annual interest rate on new credit card offers is currently 21.59% in September, up from 21.4% in August.

Three-month trends from Bankrate.com show the same dynamic, with credit card offers up 18.16% at an average APR of 18.38%. You have to go back to January 1996 to get a comparable APR of 18.12%, Bankrate experts said

How to improve a score, when will this happen?

LendingTree’s estimated price differences underscore “how important your creditworthiness remains, even in the face of rising inflation and aggressive rate hikes,” said consumer credit expert John Ulzheimer.

“In fact, the most important factor in determining the cost of borrowing is still your credit quality, as measured by your credit scores,” said Ulzheimer, a formerly of Equifax and FICO.

Is there room for improvement in your creditworthiness? And if so, when can an increase be expected?

Check your reports for errors. In fact, the big three credit bureaus Equifax (EFX), Experian, and TransUnion (TRU) announced last week that they would be extending free weekly credit reports through 2023.

It is also important to make payments on time. Payment history is an important component in a credit score, and a missed payment could hurt your score by 90 to 110 points, LendingTree said.

There are many ways to reduce a score, Ulzheimer said, and that also means there are many ways to build it up, too. “But in general, if you stop missing payments and limit the amount of credit card debt you have — then lather, rinse, repeat — you’ll end up with good, then great results.”

Now for the bad news: There’s no set timeline for how quickly credit ratings will improve, Ulzheimer noted.

It could take a month — or it could take a couple of years, he said. It depends on whether you’re trying to get debt like a credit card balance out of your report, or just waiting for derogatory information to leave the report, he said. Or maybe consumers are facing a combination of both problems, he said.

Suppose a score is stalled by credit card debt, but the borrower writes a check to pay off the debt. In this case, a score can improve within 30 days, he said.

But what if the score is clouded by defaults? Ulzheimer said: “You will wait up to seven years for your results to fully recover.”

Do not miss:

Fannie Mae is launching a pilot program to include on-time rent payments in credit reports. Here’s why this could be a game changer for renters

-Andrew Keshner

(ENDS) Dow Jones Newswires

09/29/22 0401ET

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