How Much is Your Bad Credit Costing You?

By January 31, 2013Credit Scores

There are many motivations for improving your credit score: lower interest rates, the ability to secure a loan or mortgage, higher credit limits and more credit card reward options. In the world of credit, the best deals go to the people with the best credit scores. But what is a good credit score actually worth in dollars?

More than $5,000 on a Loan

Whether the money is used to go to college or to buy a new car, almost everyone applies for private loans (from a bank) at least once. However, if you squeak by – meeting the lending requirements with the lowest acceptable credit score – it’s going to cost you. Compare the interest rates on a $25,000 loan that is to be paid off in six years (or 72 monthly payments).

Interest Rate Total Interest Paid Monthly Payment
5.5% $4,460 $413
7.5% $6,200 $437
12.5% $10,800 $501

The difference between the highest rate and the lowest rate is more than $5,000! However, there are still significant financial gains if you are able to improve your credit enough to shave off a few interest points – the difference between 7.5 percent and 12.5 percent is $4,600.

More than $500 per year on Credit Cards

Without a decent credit score, it can be difficult to secure a credit card. Many lenders have tightened their application requirements, and the best interest rate (after any promotional period) is 10.99 percent. If you are able to get your hands on a credit card with less-than-perfect credit, you will likely have an APR of 20.99 percent. How much in interest does that cost you? With an average balance of $8,000, the higher interest rate will cost about $60 more per month, or $720 annually.

More than $50, 000 on a Mortgage

Buying a home may be the most expensive purchase you will ever make, and with bad credit, it can cost you even more (if you can even qualify for a home loan). While the best rates go to the people with the best credit scores, the difference of even a few interest points can add up to big money over the life of a mortgage. Here is an example of three different mortgage rates, the resulting monthly payments and the total interest paid over the life of a 30-year mortgage:

Interest Rate Total Interest Paid Monthly Payment
2.75 % $140,005.67 $1,222.25
4.75 % $260,364.46 $1,556.58
5.66 % $319,621.06 $1,721.18

The difference between the best rate and the poorest highest rate is nearly $180,000 in total interest costs. However, improving your credit score from a rate of 5.66 percent to 4.75 percent can save you almost $60,000.

Having bad credit is expensive. Improving your score can mean huge interest savings over the life of your borrowing, as well as significant savings on a monthly basis. If you combine the three examples above, the difference between good credit and bad credit amounts to $645 in monthly payments, or a cost of $7,740 per year.

How much is good credit worth to you?

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