The Cost of Bad Credit

HOW MUCH WILL BAD CREDIT COST YOU? Is it worth it to improve your credit score? It all comes down to money. You will pay more money for vehicle and home purchases if you have a poor credit score. You will spend more of your hard-earned cash on interest than you'd like to believe. But don't take those statements at face value. The following examples will demonstrate how expensive bad credit truly is over the course of a lifetime. HOW DOES YOUR SCORE MATCH UP? 300-499 800-850 500-549 The average 6% 8.5% 18.4% American has a credit score of 550-599 9.9% 687. These score FICO SCORE DISTRIBUTION BY POPULATION classifications are 18.8% used by the major 750-799 10.1% credit bureaus 600-649 to rank and 12.2% categorize credit 16.2% applicants 650-699 700-749 BUYING A CAR WITH BAD CREDIT Interest might seem like a minor concem compared to the sticker price of the new or used car you have your eye on, but when you add up the costs over time, your interest rate, which is dictated by your credit score, can be the deciding affordability factor. GOOD CREDIT BAD CREDIT Car loan applicants with lesser Good credit applicants with credit scores of 700 or higher enjoy 3% 12.9% credit scores must pay interest rates up to 12.9% - maybe more. interest rates as low as 3%. They purchase the same $10,000 They purchase a $10,000 car car with a 48 month loan. and obtain a 48 month loan. Each month, they will owe GOOD CREDIT $221 $267.78 for their car payment. Each month, they will owe $221.34 for their car payment. That's $46.44 more than the BAD CREDIT $267 person with good credit will pay each month for the same vehicle. At the end of four years, they will GOOD CREDIT $624 At the end of four years, they will have paid a total of $624.48 in have paid a total of $2,853.39 in total interest for their vehicle. BAD CREDIT |$2,853 total interest for their vehicle. A bad credit score raised the price of this car by $2,228.91 USING A CREDIT CARD WITH BAD CREDIT Even the best-laid financial commitments can be compromised when emergencies arise. Good or bad credit, sometimes credit cards are necessary to overcome financial hurdles. Credit cards can either work as a useful tool or they can quickly damage a credit score if they are not handled correctly. The average credit card interest rate is 15.07%, but a bad credit score can raise that figure even higher. 1234 5678 9876 YARD- 12/99 MONTH/YEAR 1234 GOOD CREDIT BAD CREDIT Top-tier credit scores can land Bad credit score applicants will credit card rates as low as 9.99%. most likely not obtain approval for a credit card interest rate lower The credit card user charges $5,000 worth of emergency than 22.99%, and that is only if expenses to their card, They pay the minimum each 9.99% 22.99% the credit score is at least 620. The rates go up to 36% as the month, calculated as 3% of the credit score drops even lower. balance, $150. For $5,000 worth of charges and GOOD CREDIT 12 years minimum payments set to 3% of the total balance, they will pay the BAD CREDIT 22 years same total per month - $150. It will take this credit card user However, it will take them 22 12 years to pay off the balance paying only the minimum, and they will have paid a total of years - 264 months - to pay GOOD CREDIT $1,816 off the balance. Only paying the minimum will cost them $8,256.28 BAD CREDIT | $8,256 $1,816.52 in interest. over the original $5,000 charges. They will pay $6,439.76 more in interest than credit card users with ideal credit scores. FINANCING EDUCATION WITH BAD CREDIT Many students find federal loans and grants do not adequately cover the cost of a college education. If you must borrow private funds to finance your education, understand the following facts about how applicant credit scores affect your education loan: If the main borrower has bad credit, a co-signer is required. Credit may affect the number and price of additional origination fees. Private loans often have variable interest rates – they fluctuate with the market. Just like all other financial situations, it's important for applicants to gain approval for education loans at the lowest interest rate possible so they pay less money out of pocket in the long run, and here's why: GOOD CREDIT BAD CREDIT An applicant and co-signer team A bad or limited credit score may have a credit score that falls qualify the applicant for a higher in the good to excellent range, private student loan interest rate qualify for a private student loan interest rate of 4%. of 12%. 4% 12% They borrow $15,000, repayable on a 10 year plan. They borrow $15,000 and plan to repay the money in 10 years. GOOD CREDIT $151 The monthly payment is $215.21, The monthly payment is $151.87. $63.34 more per month. BAD CREDIT $215 When the last payment is made, GOOD CREDIT $1,816 In total, the interest charges will they will have paid $3,224.12 in equal $10,824.77 for a total loan interest, a total bill of $18,224.12. BAD CREDIT $8,256 amount of $25,824.77. It will cost a bad credit applicant $7,600.65 more than a borrower with top-level credit to finance a portion of their education. BUYING A HOUSE WITH BAD CREDIT While it may not seem possible to purchase a home with bad credit, many lenders offer options specifically for bad credit borrowers. However, the opportunity comes at a price. Bad credit borrowers will pay thousands more in interest over the course of the loan. Here's an example: GOOD CREDIT BAD CREDIT With a credit score of at least 760, 760 Mortgage approval may be given mortgage interest rates can drop to those with credit scores as low to 4.072 percent. as 620, but the interest rate will 620 The good credit applicant obtains increase to 5.661 percent. Excellent Credit Fair They also sign on to a $200,000 30 year fixed-rate mortgage. approval for a $200,000 30 year Credit fixed-rate mortgage. 4.072% 5.661% Their monthly mortgage payment Their monthly mortgage payment GOOD CREDIT $963 will total $1,155.86. That's $192.71 will total $963.15. more per month than the person BAD CREDIT $1,155 with good credit will owe. Once the mortgage is paid off, GOOD CREDIT $146,734 Once the mortgage is paid off, they will have paid a total of they will have paid a total of $146,734.36 in interest. BAD CREDIT $216,110 $216,110.56 in interest. That's $69,376.20 more than the good credit applicant paid for the same mortgage amount. The only difference? Their credit score was 140 points higher. There was no difference in the lives of these two applicants, one with good credit and one with bad credit. They both: Purchased a $10,000 Charged $5,000 to a Obtained $15,000 in Financed a $200,000 vehicle. credit card. education loans. mortgage. But in the end, there was a major difference in total interest charges. GOOD CREDIT APPLICANT BAD CREDIT APPLICANT Paid $624.48 interest on car. Paid $2,853.39 interest on car. Paid $1,816.52 interest on credit card. Paid $8,256.28 interest on credit card. Paid $3.224.12 interest on private student loan. Paid $10,824.77 interest on private student loan. Paid $146,734.36 interest on mortgage. Paid $216,110.56 interest on mortgage. Total: $152,399 Total: $238,045 Bad credit cost a total of $85,645.52 more. SOURCES www.fico.com/en/blogs/risk-compliance/fico-score-distribution-remains-mixed/ www.myfico.com/crediteducation/whatsinyourscore.aspx www.carsdirect.com/auto-loans/typical-interest-rates-for-good-and-bad-credit www.creditcards.com/credit-card-news/interest-rate-report-100114-up-2121.php blog.readyforzero.com/how-to-find-a-lower-credit-card-interest-rate/ www.alltuition.com/library/financial-aid/loans/private-loans/ www.bankrate.com/finance/mortgages/can-a-low-credit-score-sink-your-mortgage-1.aspx