U.S. Markets open in 1 hr 19 mins

5 Reasons You Need to Repair Your Credit Now

Elizabeth Aldrich, The Motley Fool

Your credit score can open doors to lower interest rates and better offers. Find out why you should start repairing your credit today.
Image source: Getty Images.

couple eating breakfast looking at laptop and papers concerned

Your credit score isn’t just a number. It can help you or it can hurt you. Some of life’s biggest milestones, like buying a home or a new car, depend heavily on your credit score. Good credit can open doors, while bad credit can stop you dead in your tracks. Here are several reasons you should start focusing on repairing your credit now.

1. You’ll get better rates on a home loan

When buying a home, your lender will use your credit score and other indicators of your financial health to determine the best rate. Excellent credit can get you a home loan with rates of around 4%, whereas rates for bad credit can surpass 6%. At a glance, this might not seem like a large difference, but every percentage point really does count.

Let’s say you are considering a 30-year fixed rate mortgage for a $300,000 home. If you put $50,000 down, you will be signing for a $250,000 loan. At 4%, you will have a $1,193.54 monthly payment and end up paying a total of $429,673.77 over the life of the loan. At 6%, you will have monthly payments of $1,498.88 and pay a total of $539,595.47. That 2% difference could save you nearly $110,000!

If you already have a mortgage, good credit can help you qualify for refinancing at a lower interest rate, which can save you money on your current home loan.

2. It will help you get approved for rental homes and apartments

Most landlords and rental companies will check your credit when you apply as a renter, and yes, the number matters. While bad credit doesn’t necessarily mean you’ll be denied, you might be asked to pay a larger security deposit or a few months rent up-front in order to secure the rental.

3. You’ll probably need to buy a car one day

When it comes to car loans, your credit score can be the difference between driving a newer model or a jalopy in order to afford the monthly payments. With bad credit, regular lenders won’t approve you for an auto loan. Your only option is to pay in cash or go for auto loans from predatory lenders with sky-high interest rates that can easily land you in a financial hole. The difference in interest rates is staggering. For excellent credit, you can get rates of around 3.5%, but with bad credit, auto loan rates can near 20%.

4. You can qualify for premium credit cards

The best credit cards either have extremely low interest rates and good 0% financing offers or they offer lucrative rewards. With good credit, you can qualify for everything from balance transfer credit cards to help you pay off debt quickly, to travel credit cards that can earn you free flights and luxury hotel stays.

5. Good credit can help you save money on your student loans

If you find yourself drowning in student loan payments, your good credit can help you qualify for student loan refinancing for private and federal loans. Depending on your credit score and other financial factors, you may qualify for refinancing options that can drop your interest rates down to as little as 2.5%. By lowering your interest rate, you can pay your student loans off faster and save thousands of dollars in interest.

Repairing your credit takes time, but small steps can make a large impact. It’s best to start working on rebuilding your credit now so that you can have access to the best rates and offers when the time comes to make major life purchases.

The Motley Fool owns and recommends MasterCard and Visa, and recommends American Express. We’re firm believers in the Golden Rule. If we wouldn’t recommend an offer to a close family member, we wouldn’t recommend it on The Ascent either. Our number one goal is helping people find the best offers to improve their finances. That is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.