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 total price paid for their cars?
To illustrate this, we will use current rates (as of July, 2001): 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 of 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 (as of July, 2002). 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!
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