Explained: How Having A Good Credit Score Can Help You Save Lots Of Money

Gold, stocks, real estate. What comes to your mind when you read these terms? Assets, right?

We tend to invest in assets like these to grow our money. But what if we told you that there is one financial asset that saves your money! Yes you read that right.

Over the past decade or so, credit score has become one of the most important parameters factored in by banks and other financial institutions while evaluating your loan and credit card applications. As a result, good credit scores, i.e. usually those of 700 & above, are no less than a crucial financial asset which has the potential to yield multiple benefits for one¡¯s financial health and even save money!

Eager to know how? Read on as we explain how having a good credit score can save you money:

How A Good Credit Score Can Help Save Money

Lower interest rates on loans

getty

Many lenders have adopted the practice of risk-based pricing for setting lending interest rates for loan applicants. As loan applicants with higher credit scores tend to involve lower credit risk, lenders try to attract such applicants by rewarding them in the form of lower interest rates. Lenders compensate for the higher credit risk involved in lending to those with lower credit scores by charging them higher interest rates.

Given that the risk-based pricing model can vary across various lenders, try to compare the loan rates offered by as many lenders as possible before zeroing in on any lender. This will help you fetch the best possible loan deal with the most suitable lender as per your financial requirements.

Now let's take an example to show how much difference interest rates make to your total loan cost, which will make it clear how a good credit score can help lots of bucks for you!

Let's assume you take a Rs 50 lakh home loan for 20 years tenure, with the bank practising risk-based pricing, and offering 8% interest rate to those with a credit score above 750, and 9% to those with a credit score of 600-750, and 10.5% to those with a low credit score below 600.

Using an online home loan EMI calculator tool, we see that the total interest cost for those with a good credit score of 750 and above will be Rs 50,37,281 (total loan cost along with principal is Rs 1,00,37,281), for those with 600-750 credit score is Rs 57,96,711 (total loan cost along with principal is Rs 1,07,96,711), whereas for those with a low credit score of less than 600 will incur interest cost of Rs 69,80,559 (total loan cost along with principal is Rs 1,19,80,559).

And the benefits don't end here. Some lenders even go a step further and offer lower processing fees to applicants with a good credit score. Lenders tend to waive off or reduce the applicable loan processing charges/fees. Such benefits can especially be helpful in the case of big-ticket loans like home loans, wherein waiver or reduction of processing fees can significantly decrease the overall credit cost for a borrower.

Savings through greater rewards on better credit cards

unsplash

Besides being a payment mode and a source of availing instant credit, credit cards also extend various benefits in the form of discounts, cash backs, reward points, no-cost EMIs, etc. However, similar to the case of loans, credit card issuers also consider credit score as one of the important factors while evaluating credit card applications, as they are a form of credit too.

That's why those with high credit scores have higher chances of getting their credit card approved. And that's not all. Chances of getting a better credit card (and thus better rewards that can save money on transactions) also tend to be higher for those who are credit disciplined, i.e. have a good credit score.

Additionally, a good credit score can also be helpful in increasing your credit limit, which in turn will enhance your ability to spend through your credit card as per your financial requirements. This also gives you more breathing room with higher credit limit availability and keeps your overall credit utilization ratio on the lower side.

Higher eligibility to transfer a loan to the better lender at lower rate

shutterstock

Also Read: Why Your Credit Score Can Fall Despite Timely Payments!

Lenders often attempt to attract credit disciplined borrowers of other lenders by offering balance transfer options at lower interest rates.

After all, an existing borrower who has shown disciplined repayment, which is reflected in a good credit score, is someone every lender would want, right? So if you have a good credit score and are repaying an existing loan, other lenders are likely to attempt to lure you with a better loan deal such as a lower interest rate by doing a balance transfer. This can turn out to be a win-win for you as well as the lender.

But before jumping to the decision, make sure that the savings in interest costs through balance transfer are significantly higher than any fees/charges associated with the process.

For more such interesting content and the latest financial news, keep reading Worth. Click here.