What Does Bad Credit Cost You?

A bad credit score is very expensive. The public is probably not aware of how much bad credit costs can add up to over time. In many cases, it can exceed over one million dollars. That’s right, over seven figures. If you have a low credit score, the additional money you pay for things such as real estate investments, car loans, and insurance are exponentially more because of the higher interest rates. Whereas, individuals who have a high credit score can accrue over six figures within a 30-year period. Now if that money is invested wisely, that number could rise to more than one million dollars.

$250,000 home paid over 30 years:
Excellent 3.9% $1,179.17 $0.00
Mildly Damaged 5.0% $1,342.05 $58,637
Damaged 6.3% $1,547.43 $132,574

Here is how bad credit can cost you in more ways than you imagined:

Mortgage: One obvious place that bad credit hurts you is the interest rate you must pay when you purchase a house. You can see with our mortgage calculator estimate above the average a bad credit score can cost in interest. The average home costs in January 2019 is $300,400. A 30-year, $300,000 loan for someone with a credit score of between 760 and 850 carried a 6.346% APR. Someone with a credit score of between 500 and 579 would have a loan term of 10.152% APR. That would mean that a person with a good score would have a monthly payment of $1,766, while the person with the bad credit score loan would pay $2,566.

The same applies to auto loans. The average auto loan is $24,864. Just think, an auto loan for a person with good credit (defined as a score of between 720 and 850) would carry a 7.221% APR, while someone with bad credit (a score between 500 and 589) would have to pay a 14.909% APR. That works out to a difference of $88 in your monthly payment. This comes to $3,168 over the life of a three year loan. The average person keeps their car for 4.5 years. That means if each person financed a new car every five years, it would cost the person with bad credit $19,008 more in car financing over 30 years than someone with good credit.

Credit cards: Let’s assume, for example, a person with good credit versus someone with bad credit carry the average credit card debt of $2,200 over 30 years. If the person with good credit had an interest rate of 9 percent and the person with bad credit had an interest rate of 20 percent, the person with bad credit will pay an extra $7,260 over a 30-year period.

Lost interest: If the person with good credit took the difference and invested that money in an account that earned 8 percent compounded annually for 30 years, he or she would have well over $1 million saved. In fact, investing the $800 difference in the cost of the mortgage alone would be worth $1.2 million.

Insurance: All types of insurance (auto, health, homeowners) will likely cost more for a person with bad credit than one with good credit. Insurance companies know that people with bad credit make more claims than those with good credit – and therefore are more of a risk to insure. If your credit score is considered on any of your insurance rates, an individual with bad credit will pay more than a comparable individual with good credit.

Job: You may lose out on a better job due to bad credit. More and more employers pull your credit report when you apply for a job, because many see a risk in employing a person with bad credit. The same can be true with promotions. People in the armed forces may not be able to get clearance for classified documents and areas due to bad credit, therefore blocking potential advancement.

Housing: Many apartment managers will run a credit check on prospective tenants. If your credit is poor, you may be denied a unit due to the risk that you may not be able to pay. Your deposit to get a new apartment if you have bad credit may need to be 30-40% higher with certain companies than if you have a good credit score. Same goes for utilities, and cellular phone companies ask for deposits with people that have less-than-stellar credit.

Health: In addition to all the financial aspects where bad credit will hurt you, it could also adversely affect your health. It’s not difficult to imagine that a person who has to pay a couple of hundred thousand dollars more for the same house as a neighbor down the street could have some financial stress in their life. This stress can affect a person both mentally and physically. Poor financing, when it is a constant source of fighting in the house can cause high blood pressure, muscle tension and mental health issues. Bad credit is no longer a situation that can be isolated from other areas of your life. The trend is only growing stronger. Consumers must take the time to make the effort to keep their credit in good standing. It will pay off with more money in your pocket and less stress in your life.

Tips to Getting Your Credit Score Back on Track

Paying Bills on Time- Paying your bills on time and paying credit cards off each month does not mean you will have a high credit score. However, it is important to pay your monthly payments on time. Late payments and charge offs are the biggest factor of your credit score. How you pay your bills determines your credit risk

Credit Card Utilization Rate- Credit reporting is a complicated formula. The formula responds favorably to a credit card utilization rate of 20 percent and below. It is a good idea to review all of your credit cards and align them correctly with the formula. If you have an American Express card or card with no preset limits, they will be rated on the highest credit charged and the 20 percent rule still applies. For various reasons, some credit grantors do not always report the maximum limit revolving accounts. Where no maximum is reported, the highest balance ever reported on the account is used. Since the highest balance is below the maximum and often substantially below it, this creates higher utilization rates too.

Keep Track- Staying on top of what the credit bureaus are reporting is very important. There are estimates that over 70% of credit reports have mistakes. The bureaus are private for-profit firms. Their clients are the reporting creditors and consumers who purchase monitoring and identity theft insurance. It costs them to address inaccuracies on their credit reports. Therefore, keeping on top of your reports is key. We know that dealing with your credit can be a tedious and lengthy process. For the amount bad credit can cost you, you can no longer afford not to fix your credit. Delegate the task to us. Call us – we can help or your money back!

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