How Much Interest Do You Actually Pay, Depending on Your Credit Rating
Your credit rating is important to lenders as it helps them assess you as a credit risk, but it is important to you too, because ultimately it determines the interest rates you pay on credit cards and loans. While I knew this when I was in my early twenties, it didn’t really matter until I thought about it in terms of pure money – how much more or less did I spend on interest alone, based on my credit rating? Here’s a look at how this can break for you.
People with a higher credit score pay less interest
Credit ratings are based on how much credit you have, how much of it you actually use, and how consistently you pay off debt on time. If you are a responsible borrower, the lender will reward you with a higher credit rating, which in turn will lower your interest rate.
For credit cards, the average annual interest rate in 2020 was 16.28%, according to the Federal Reserve , but your rate could be higher or lower depending on your credit history. According to the latest CFPB report on the consumer credit card market , the average effective interest rate by credit rating is as follows:
- Deep Subprime (579 or below) = 21%
- Subprime (580 – 619) = 20.5%
- Almost Prime (620-659) = 19%
- Prime (660-719) = 16.5%
- Super Prime (720 and above) = 13.5%
(Interest rates will vary depending on your card type, as premium travel cards tend to be higher than cashback cards).
A good credit rating means less money spent on interest
By having a rough idea of how much interest is charged for each level of your credit rating, you can know how much money you will spend on interest if your rating gets worse or better. Suppose you are a borrower with $ 10,000 in debt and you plan to repay it evenly over 36 months. Using a loan calculator , you can calculate the total amount of interest:
- Deep Subprime (579 or below) = $ 3560
- Subprime (580 – 619) = $ 3473.
- Almost Prime (620 – 659) = $ 3191
- Prime (660-719) = $ 2746
- Super Prime (720 or more) = $ 2,220
With a Super Prime, you will save $ 1,340 in interest payments, compared to the lowest level for paying the same amount of debt on the same repayment schedule. And this is just one example: if you think about the entire lifespan of your credit card, the savings from a high credit rating can really increase.
How to improve your credit score
Granted, not all of us are fortunate enough to have brilliant super-first-class credit ratings, but there are zero ways to improve your rating – this Lifehacker post is a good place to start . Personally, I know how much net cash I will save on interest, which somehow makes the rates I charge more realistic , motivating me to get the highest credit rating possible. In turn, it made me more disciplined when it comes to using my credit in general – a win-win.