ELFI Credit Series: Why Maintenance Matters for Credit

Once you establish credit, it’s time to go into maintenance mode. Good credit won’t sustain itself without your attention, and you need it for just about every life milestone.

Not convinced? Let’s go through a sample life trajectory to see how good credit comes in handy at nearly every turn, from getting a car loan and a good auto insurance rate to obtaining a mortgage and refinancing student loans.

» RELATED: Don’t Just Build Good Credit — Maintain It

Buying a car

Let’s start at age 25. You’ve just finished up grad school and landed your first professional job. But there’s one problem: It requires a commute, and you don’t have a car after years of relying on public transportation in the city. Time to get a vehicle.

You don’t have enough saved to pay cash, so an auto loan it is. Credit determines your borrowing price.

The average auto loan rate for customers with super-prime credit — scores ranging from 781 to 850 — is 4.01% for new cars and 4.66% for used cars, according to Experian data from the third quarter of 2019. For customers with non-prime credit (scores of 601-660), the average rate for new and used cars is 7.77% and 11.01%, respectively.

Source: Experian, State of the Automotive Finance Market, Q3 2019.

As the owner of a new car, you’ll also need car insurance. And — surprise! — credit is a factor insurers consider when they set premiums. They use FICO insurance scores, which are different than FICO credit scores but are still credit-based. These scores are a predictor of the risk you pose to insurance companies, according to FICO.

“People who don’t manage their finances responsibly are also not likely to maintain their homes or autos responsibly — and, thus, are more likely to file claims,” according to the FICO Insurance Score product sheet.

Refinancing student loans

You start the job with your new set of wheels, and it’s going along swimmingly. But now, the grace period on your student loans is about to end. After years of deferring the debt during college, it’s finally time to face it — and all the interest that has accumulated.

You owe a total of $75,000 in student loan debt from your undergraduate and graduate degrees, with interest rates averaging 7%. On a 10-year repayment timeline, you owe $871/month.

After researching all your options — income-driven repayment, Public Service Loan Forgiveness, just buckling down and paying it — you decide that refinancing the student loan debt makes the most sense.

Typically, you need a credit score in the high 600s to even qualify for student loan refinancing. From there, your credit determines your rate (and how much you save). Assuming you stay on a 10-year repayment schedule, you could get a rate as low as 3.99% with Education Loan Finance*. That’d lower your monthly payment to $759, saving you $112/month and more than $13,000 overall, according to our student loan refinance calculator.

But of course, the lowest rates require the best credit. Shopping around will help you find the lowest possible rate you qualify for, but too many hard pulls on your credit could hurt you. To maintain your credit while comparing rates, stick to lenders that can prequalify you with a soft credit pull, so there’s no ding to your score.

Buying a house

Time passes. You’ve been living in apartments for a few years (with no problems ever renting a place because landlords love your good credit). But you can’t help thinking about how you’ve been diligently paying rent for years with no wealth to show for it. Maybe it’s time to think about investing in a place of your own.

You keep paying down your student loan debt, slowly socking away the money you saved from refinancing. Before long, there’s enough for a down payment.

Mortgage shopping begins. Like with rates for auto loans and student loan refinancing, home loan rates are credit-based. Now, credit matters more than ever: Your mortgage is likely the biggest debt you’ll ever have, and qualifying for a rate that’s even half a point lower could save you hundreds of dollars a year.

But you also realize that credit score isn’t the only thing lenders are looking at. They also care a lot about your debt-to-income ratio. Yours might have been too high before — the maximum allowable DTI is 45% to 50%, according to guidelines from Fannie Mae. But because you have good credit and have made a dent in your student loan debt, banks are happy to help you buy your first home.

Set yourself up for success

We could go on and on. Good credit is necessary to get low rates on personal loans, qualify for the credit cards that give you the best rewards, and co-sign a student loan for your child.

And speaking of kids, you can set yours up for future credit success by making them an authorized user on your credit card (at an appropriate age, of course). That way, the good credit you’ve spent a lifetime building and maintaining will give them a head start.

No matter what your (and their) goals are, proactively maintaining good credit over time will almost certainly help achieve them.

Credit-worthiness is an important factor in maintaining good financial health. And if you’re considering student loan refinancing, your credit score plays an important role in securing great rates. ELFI’s prequalification process is quick, 100% online and won’t affect your credit*. Speak with one of our Personal Loan Advisors today, or see how much you could save today.*

*Subject to credit approval. Terms and conditions apply.