| 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!
|
