# The Cost of Poor Credit

Now that you know how to grade your credit and what your credit score is. Let's see what it's costing you. From credit cards to mortgage loans and everything in between, people with poor credit pay much more for goods and services purchased over time than those with excellent credit. Hopefully, the illustrations below will convince you it's time to change your ways.

## Mortgage Loans

Because mortgage loans almost always involve a large amount of money, even a one-half percent variation in the interest rate is significant. Basically, a one-half difference in interest rate is the equivalent of paying \$5,000 more or less on a 15-year mortgage.

If Person A with excellent credit obtains a mortgage at 8% and Person B with not so good credit obtains a mortgage at 10%, each borrows \$100,000; the difference column is how much more Person B with bad credit will pay for his house:

## The Cost of Poor Credit - Auto Loans

Suppose two people purchase identical cars from the same car dealership. Both apply for auto loans in the amount of \$18,000 and each plans to repay her loan over a three-year (36 month) period. The only difference between the two people is that Person A has an excellent credit rating and Person B has a bad one. Person B will have to pay a higher interest rate. What will be the difference in the total price paid for their cars?

To illustrate this, we will use current rates: 7.30% for those with excellent credit and 20.95% for those with really bad credit. Using the same terms as set forth in the paragraph above, the person with excellent credit will have a car payment of \$532.07 per month. The total price paid for her car will be \$19,154.52. The person with really bad credit will have a monthly car payment of \$677.69, which is \$145.62 more each month than the person with excellent credit. The total price paid for her car will be \$24,396.84.

What has a poor credit rating cost Person B? In this case, the person with bad credit will pay \$5,242.32 more for the very same car that the person with excellent credit purchased.

Perhaps you're thinking that your credit isn't that bad, certainly not bad enough to warrant financing at a 20% rate. You could qualify for a loan at 13%. Well, even at 13%, you will pay \$2,679.16 more for the same car than will Person A with excellent credit.

In the real world, the difference is even greater since people who obtain financing at a lower rate can afford to pay off their cars and homes much earlier. The person with poor credit must stretch out his loan over a longer period in order to afford the monthly payments, resulting in his paying thousands more for a car and tens of thousands or more for a home than he would have paid had he had good credit.

## Credit Cards

Those with excellent credit ratings can get approved in about a minute online at any major credit card website for a card with an interest rate of about 9% and no annual fee. Those with bad credit don't get approved at all, or they get approved for cards with 19% to 24% interest rates, and have to pay annual fees that average anywhere from \$200 to \$450 dollars! How much this costs you depends on how big of a balance you carry from month to month. But suppose two people, one with good credit and another with bad credit, habitually carry a balance of \$3,000. The person with good credit pays about 8% and the person with bad credit pays at least 19%. The person with bad credit is going to pay more than twice as much, plus all the fees associated with having bad credit.

## Insurance

Most people aren't aware that their credit files are pulled when they apply for any type of insurance. Your insurance agent will charge you more if you have a bad credit rating. Although this doesn't sound logical, particularly since there isn't a correlation between bad credit and insurance risk, it is nevertheless done and used to determine your insurance premium. (There is some proposed legislation designed to stop this practice.)

## Employment and Housing

Although under federal and state laws you can't be denied employment or housing based on the fact that you've previously filed for bankruptcy, employers and landlords can and do discriminate against applicants with bad credit ratings. Your poor credit rating could result in your living in substandard housing and being denied good-paying jobs.

## Summary

The above information is not offered for the purpose of torturing those with bad credit. Its purpose is to illustrate why you should work towards getting and maintaining a good credit rating. Your poor credit rating is costing you a fortune!