How Much Interest You Actually Pay, Based on Your Credit Score

Photo: Stokkete (Shutterstock)

Your credit score is important to lenders, as it helps them assess you as a credit risk, but it’s important to you, too, because it ultimately determines the interest rates you pay on credit cards and loans. While I knew this in my early twenties, the significance didn’t really sink in until I thought of it in terms of pure cash—how much more or less was I spending on interest alone, based on my credit score? Here’s a look at how that might break down for you.

People with higher credit scores pay less interest

Credit scores are based on how much credit you have, how much of it you actually use, and how consistently you pay off owed balances on time. If you’re a responsible borrower, a lender will reward you with a higher credit score, which will in turn lower your interest rate.

For credit cards, the average APR in 2020 was 16.28%, according to data from the Federal Reserve, but your rate might be higher or lower based on your credit history. According to the most recent CFPB Consumer Credit Card Market Report, the average effective interest rate by credit score tier looks like this:

• Deep Subprime (579 or lower) = 21%
• Subprime (580 - 619) = 20.5%
• Near Prime (620 - 659) = 19%
• Prime (660 - 719) = 16.5%
• Super Prime (720 or greater) = 13.5%

(Interest rates will vary based on the type of card you have, as the rates for perk-laden premium travel cards tend to skew higher than what you’d get with a cashback card).

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A good credit score means less money wasted on interest

Having a rough idea of how much interest is charged for each credit score tier will then tell you how much money you’d spend on interest if you score worsened or improved. Let’s say you’re a borrower with $10,000 in debt, and you plan to pay it off evenly over 36 months. Using a loan calculator, this is how the total interest charges would stack up:

• Deep Subprime (579 or lower) = $3,560
• Subprime (580 - 619) = $3,473
• Near Prime (620 - 659) = $3,191
• Prime (660 - 719) = $2,746
• Super Prime (720 or greater) = $2,220

With a super prime score, you will save $1,340 on interest payments compared to the lowest tier, for paying off 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 cost savings from a high credit score can really add up.

How to raise your credit score

Of course, not all of us are fortunate enough to have sparkling super prime credit scores, but there are zero-cost ways to improve the score that you do have—this Lifehacker post is a good place to start. Personally, knowing how much pure cash I’ll save on interest makes the rates I’m being charged more real somehow, motivating me to get my credit score as high as possible. In turn, that has also made me more disciplined when it comes to using my credit generally—a win/win.

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