Should you invest in credit repair?
Does it make dollars (and sense) to invest in credit repair?
To find out, let’s first revisit the definition of ‘invest.’
1. expend money with the expectation of achieving a profit or material result by putting it into financial schemes, shares, or property, or by using it to develop a commercial venture.
The gist of this definition is that we put money into something with a reasonable hope of profit or material gain.
And that’s exactly the outcome you’ll enjoy when you repair your credit. In fact, your credit score (and credit history) is tied to so many other aspects of your financial life these days, sort of like the hub of a wheel. Just about every loan, interest rate, and debt are dictated by your credit score, but there’s so much more to it these days.
Some things that your credit score influences:
• Credit cards
• Auto loans
• Student loans
• HELOCs and second loans
• Business loans
• Utility accounts
• Cell phone accounts
• Insurance coverage
• Renting an apartment
• Getting a new job
As you can see, this is a formidable list, so the difference between a 580 FICO score and a 720 FICO (as an example) will make a significant difference to your finances.
Just how much could a good credit score matter to your bottom line?
According to Bankrate.com, the average credit card APR in the U.S. is 22.9% if your credit score sits between 600 and 679. However, if your FICO is 740 or higher, the average APR falls to just 12.99%. Based on a $10,000 credit card, the high-score consumer would have to pay $297 over five years (60 months to pay it off). The high-score consumer, however, would need to pay a lofty $715 per month for seven years at that APR to pay off the balance! In total, that’s the difference between an $18,414 total payoff compared to a $44,330 payoff – for a total savings of more than $25,000!
Granted, this is just a hypothetical based on two consumers on the opposite ends of the credit score spectrum, but there’s far more proof that a good credit score will save you significant money.
For instance, if we look at a $25,000 auto loan:
For subprime car buyers with a credit score of 550 or below, let’s say the average loan rate is 18.9%. That means they’ll pay $13,828 in total interest (on top of the $25,000!) over 60 months.
If their score was marginally higher, like in the 620 to 680 bracket, the average interest rate drops to 11%, so they “only” have to pay $7,614 in interest.
However, if they could achieve a prime 740-850 credit score (which is considered excellent), that interest rate will sink to 5.1%, so they’ll only have to drop $3,375 in total interest.
Therefore, a great credit score will save this consumer more than $10,000 in this scenario – just in one auto loan!
Of course, the biggest purchase most people make in their lifetime is a home, so repairing your credit beforehand ensures that you get the best loan rates. Let’s look at a loan amount of $275,000 as an example. If a homebuyer has a 5% interest rate, their monthly payment will be $1,475, and they’ll pay off $530,800 in interest and principal over the life of the loan.
However, if they could increase their credit score and qualify for a better loan program with a 4% interest rate, that same loan size would mean a $1,315 monthly payment and a $472,000 total payoff.
In this case, taking the time (and a little money) to repair your credit will save this consumer almost $59,000 over the 30-year term of the mortgage!
While these individual case studies demonstrate significant savings with a better credit score, remember that, in the real world, a household may have 4-5 credit cards, 2 auto loans, a student loan, and a mortgage – all at the same time!
Furthermore, if a better credit score saves you $500 per month in lower interest rates, for example, that means they’d also have $500 available to pay down the debts faster, amass savings, or invest towards retirement. In that aspect, there’s a huge opportunity cost to NOT repairing your credit.
Now that we determined that credit repair definitely fits the “profit” or “material result” component of our initial definition, let’s answer another pressing question: what’s the best way to repair your credit, and with whom?
Credit repair is an involved and ongoing process of leveraging credit reporting laws and regulations in order to get negative, inaccurate, or questionable items removed from your credit report, as well as paying down balances to certain ratios and also adding a healthy mix of new credit.
While it is possible for a consumer to attempt to repair their own credit (and it’s within their legal rights), that is also not the most effective way to achieve the best outcome – an excellent credit score. Consumers just don’t have the knowledge, experience, resources, and patience to get it right.
The other option is to enlist the help of a credit repair firm. A reputable, professional credit repair firm will cost money (like any investment) but will maximize the result we’re looking for – improving the score as much as possible in a timely manner.
The caveat is that you should be very careful when hiring a credit repair firm to help you, and we’ve highlighted some great ways to choose the best credit repair firm (like Blue Water Credit!) in earlier blogs.
But, as we can see from our earlier illustrations, it definitely pays to invest in credit repair and do it right with a legitimate credit repair agency such as Blue Water Credit, as the savings to the consumer will be profound.