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Credit Score and Interest Rates

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How a low credit score can cost you over time

When it comes to interest rates, the math is simple: A high credit score generally equals lower rates. That means your credit score is a key factor in securing lower interest rates on big purchases, like a home or car.

Let’s say there was a couple named Angel and Quinn. They decided the next step in their relationship was to buy their first home together, but hadn’t accounted for their separate credit scores.

The couple combined their savings into a joint account when they first moved in together. But credit scores are ranked individually, and the goal of joint home ownership depends on each person’s past. Let’s see how this would work. 

A tale of two credit scores: his and hers

Hers: An excellent credit score

Quinn had always been diligent about her finances and had a credit score in the “excellent” range. On the date they applied for a mortgage, Quinn qualified for an APR (or annual percentage rate) of 3.2 percent on a 30-year fixed-rate mortgage from their local bank. 

The results: lower interest. For the $280,000 mortgage the couple was seeking, the monthly payments would be $1,211, with total interest payments of $155,927 over 30 years. 

His: A fair credit score

Angel made more money than Quinn, but also had a lower credit score. Several late auto loan payments were on his credit report. That mark on his credit report, along with carrying a $4,000 balance on his sole credit card that had a $5,000 credit limit (considered “high credit utilization”) dropped his credit score into the “fair” range.

The results: higher interest. On his own, Angel qualified for a 30-year fixed-rate mortgage with an APR of 4.3 percent. That would translate into monthly payments of $1,386 and $218,830 in total interest payments over 30 years.

Which means the exact same house would cost the couple $62,903 more in total interest payments if they’d used Angel’s credit score. 

The good news: Because of the mark on Angel’s credit report, the couple decided to apply for a mortgage using only Quinn’s name and credit score. Her excellent score — combined with the couple’s regular income and sizable savings — communicated to the bank that she had a strong history of making on-time payments and dependable funds to put toward payments each month. The couple decided they would work to improve Angel’s score and refinance in order to add him to the loan at a later date. 

The bottom line: Get to know your credit score. Frequent late payments and a high credit utilization rate can lower your credit score. The lower your credit score, the more likely you will pay a higher interest rate on loans and/or credit cards.

That’s why it’s important to be proactive. Request a free copy of your credit report to find out how your credit history may impact your financial life. 

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This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this site were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.