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Most everyone I know is looking for ways to save money or cut expenses in today’s challenging economy.  Eating out less frequently, driving less, running the air conditioning a little bit lower and buying things on sale are actions we can all undertake to tighten our belts and increase our savings.

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Another way to save money, that many consumers often overlook, is by having a higher credit score.  Having a higher credit score gives you more access to different types of credit, increases your chances of being approved and provides you with access to more favorable credit terms. More favorable terms equals lower interest rates on your loans and saves you money.

For example, let’s compare two consumers, Bill and Carol, who are shopping for a new car.  Assume they are both purchasing a new $21,000 car, both make approximately $60,000 a year and are each putting $3,000 down.  They are both financing $18,000 with a 60-month term. When the finance manager at the dealership pulls their credit reports and FICO scores, Bill has a score of 635 and Carol has a score of 741.

[Related: Credit Score Reason Codes: What They Mean and Why You Should Care]

Most auto lenders use the FICO score to determine the interest rate that will be offered to the auto loan applicant when financing the deal.  Lenders tier the possible interest rates to offer based on FICO score ranges where lower/more favorable interest rates are provided to applicants with higher FICO scores and higher interest rates are provided to those with lower FICO scores.  This concept or practice is known as risk-based pricing.

Bill Carol
FICO Score 635 741
Loan Amount $18,000 $18,000
Loan Term 60 months 60 months
APR 11.81% 4.83%
Monthly Car Payment $399 $338
Amt Paid (life of loan) $23,940 $20,280

Source: APR figures provided by myFICO.com

The difference in the amount of interest charged can translate into thousands of dollars saved over the life of the loan.  Take Bill and Carol for example. Based on the table provided above, Bill will pay about $60 more per month for the same loan as Carol – who has a lower monthly payment as her interest rate is substantially lower given her higher FICO score.  Sixty dollars each month may not seem like much, but that equates to $3,660 over the 5-year term of the loan!

Having a good credit score should be an important part of your overall plan for sound financial health.

Image by jtyerse, via Flickr

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