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Oct. 2, 2022, 7:29 p.m. EDT

Win the battle against inflation: How to save $50,000 on your mortgage, credit-card and car loans

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By Andrew Keshner

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

People with “very good” credit scores could avoid nearly $50,000 in extra borrowing costs for 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 on the extra costs paid of the lifetime of transactions like a 30-year mortgage, a five-year car loan and a three-year personal loan. On a monthly basis, consumers with the higher score range could be holding onto $252 — no measly sum especially now.

That’s according to a new analysis from LendingTree after it compared the offers lenders extended to users in those two credit-score ranges during the second quarter.

Credit scores can stretch from 300 to 850. A “very good” score ranges from 740 to 799, while a “fair” score falls between 580 and 669. Americans had an average 716 score as of April, unchanged from last year, according to FICO /zigman2/quotes/200175312/composite FICO -1.72% .

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

A car loan for $28,000 could cost a “fair” credit consumer another $2,500 over a “very good” score, LendingTree data showed.

Meanwhile, a $315,000 mortgage — at an interest rate of more than 5% — could cost a “fair” credit consumer more than $40,000 extra than a mortgage holder with a “very good” credit score. (Of course, a mortgage hovering above 5% seems like a faraway hope with mortgage rates now approaching 7% .)

Credit scores have long been important number for consumers because of how they factor into lender decisions about rates and terms. But household borrowing costs are in sharp focus now, and rumblings of a potential recession will keep household finances front of mind.

Prices have been increasing at four-decade-high rates, most recently seen in an August inflation report showing a 8.5% year-over-year increase, despite decreasing gas prices.

Interest rates have been climbing too, propelled directly and indirectly by the Federal Reserve’s continuing rate hikes that are intended to cool inflation. Last week, the central bank layered on another 75-basis point increase and Federal Reserve Chair Jerome Powell signaled more to come “ until the job is done .”

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

The average annual interest rate on new credit-card offers is currently 21.59% in September, up from 21.4% in August, according to LendingTree estimates .

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

How to improve a score, when will that happen?

LendingTree’s estimated price differences highlight “just how important your credit scores continue to be even in the face of rising inflation and aggressive rate hikes,” said consumer-credit expert John Ulzheimer.

“In fact, the single most important factor when determining the cost of credit is still your credit quality, as measured by your credit scores,” said Ulzheimer, who formerly worked at Equifax and FICO.

Is there room for improvement with your credit score? And, if so, when should you expect it to rise?

Check your reports for any errors. In fact, the three major credit-reporting companies, Equifax /zigman2/quotes/208789454/composite EFX +0.44% , Experian /zigman2/quotes/204348666/delayed EXPGF +0.54% and TransUnion /zigman2/quotes/209192458/composite TRU +2.28% last week announced they would be extending free weekly credit reports through 2023.

It’s also important to make timely payments. Payment history is an important component in a credit score, and a missed payment might ding your score by 90 to 110 points, LendingTree said.

There’s many ways to reduce a score, Ulzheimer said, and that means there’s also many ways to build it too. “But, generally speaking if you’ll stop missing payments and limit the amount of your credit-card debt — then lather, rinse, repeat — you will eventually end up with good and then great scores.”

Now for the bad news: There’s no set timetable for how quickly credit scores improve, Ulzheimer noted.

It could be a month — or it could take a few years, he said. It depends if you are attempting to get debts, like a credit-card balance, off your report or if you’re merely waiting for derogatory information to leave the report, he said. Or maybe consumers are facing a combination of both issues, he said.

Suppose a score is getting bogged down by a credit-card debt, but the borrower writes a check to extinguish the debt. In that instance, a score can improve within 30 days, he said.

But if the score is marred by defaults? Ulzheimer said, “You’ll wait up to seven years before your scores fully recover.”

Don’t miss:

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

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