The Cost Of Bad Credit - More Than Credit Cards Rates

[jeffrey]

While having a bad credit score can make it more difficult to get credit, it also costs an individual more when credit is available. Exactly how much more it costs is difficult to quantify since each person's circumstances are different and rates that can be received differ on a monthly basis. We can, however, make some general assumption to give an idea of how much more it costs a person with poor credit compared to one who has good credit. The amount a person with poor credit must pay may surprise you.

While people who talk about bad credit usually refer to the higher interest rates that they must pay for credit cards, there are also a number of other areas where costs will increase. These include mortgages, insurance, auto loans as well as a number of other costs that may not be able to be fully quantified:




Mortgages: Your credit score will affect the interest rate you can get on your mortgage meaning the lower your score, the higher interest you're going to have to pay. While the rates will vary, here is a general guideline of what you will have to pay.

Prime Credit Score (720+): best rate
700 - 720: +0.15%
675 - 699: +0.70%
620 - 674: +1.75%
560 - 619: + 2.75%
500 - 559: +3.60%

That means if a person with a 725 credit score could get a rate of 6.5%, then a person with a credit score of 555 would get a rate somewhere around 10.1%. For a 30 year loan of $200,000, the difference would be $1264.14 a month (prime rate) versus $1769.94 a month for a total of $505.80 a month more for the person with bad credit. That comes to a whopping $182,000 over the life of the loan. Using the numbers above, you can do an estimate of how much more you're paying if you know your credit score.

In addition to the having to pay much more, people with lower credit scores have to pay higher up front costs in the form of mortgage loan origination fees.

Auto Loans

If you have poor credit, you will not qualify for zero or low APR financing offered by manufacturers as these rates are reserved for those with the best credit ratings. You will have to deal with a sub prime lender and will be charged rates as high as 25%. Again, loan origination fees will likely be higher. A 3 year auto loan for $15,000 at 20% will add approximately $5,000 to the cost versus a person with good credit that could get 0% financing.

Credit Cards

Most people are aware of the much higher rates that people with poor credit scores must pay compared with those with good credit scores. Interest rates near 30% are common for those with poor credit ratings if they can qualify for a credit card at all. When they can, they often have to pay fees that are waved for customers with good credit. These can include a yearly fee, set up fees, account maintenance fees, special one-time fees that can add an extra $200 a year to a card. A person with good credit could play the 0% transfer game at best and get a card with a single digit interest rate at worst.

Insurance All types of insurance are now pulling credit scores as a way to determine risk. The facts are that people with lower credit scores have a higher risk factor to insurance companies than those with good credit scores. For example, a person with a good credit score may receive a 10% discount on their auto insurance compared to someone with a poor credit score. With the average cost for car insurance in 2005 being $870, that's an $87 savings. Similar discounts are available to those with good credit ratings from life insurance, homeowners insurance, etc which means a difference of hundreds of dollars a year.

The costs of bad credit don't stop with these. There are a number of other ways that poor credit can affect you. Utility deposits may be higher, you may have to pay more in deposits for an apartment lease (or be denied all together) and poor credit may even mean you are passed over for a job. Those with low credit ratings have to pay hundreds, if not thousands, of extra dollars a year over someone with good credit.

[Diolla]

This kind of thing just makes me mad. Why should credit scores matter when it comes to car insurance or jobs? I don't use credit, I pay my bills on time and when I want to buy something I buy with cash. I USED to have a great credit score and a ton of debt. NOW I have a lousy credit score and no debt. What is wrong with this picture?

[lillyb]

I agree, Diolla. My goal is to have a lousy credit score BECAUSE I quit borrowing money (the only way to keep a good credit score). I'm not going to stay in debt for the rest of my life just to have a good credit score. Guess I'd rather be giving the insurance company a bit more of my money to insure my paid-for car, and I'd be able to afford that because I quit the credit game.

[kcsvti2121]

Firms are looking for discriminators because often the folks doing the hiring aren't really trained in the art of conducting an interview. It's just something they're asked to do once in a while over and above their normal duties.

Firms don't want to shell out the extra funds to get people who are qualified to inteview people even though to do so more than pays for itself. So the folks who are stuck doing the interviewing look for these so called character indicators.

The best move to make is to simply get a credit card through your bank and impose a restrictive minimum balance on yourself. Most of us have some activity we engage in on a fairly regular basis and, typically that activity entails spending money.

Use your credit card to pay for the activity and then immediately, or as soon thereafter as possible, pay the entire balance. If you bank on line this is simply too easy to NOT do. It just becomes a monthly bill like your others but, you're simultaneously maintaining solid credit activity.

Not the smoothest of segue's but this bears mentioning. If you're married and your spouse is paying the bills be alert for significant emotional events in his/her life. Especially events that take on a life of their own and take some time to work themselves out. DO NOT assume the event isn't causing him/her to start losing it and dropping the ball on things he/she is normally very much on top of.

I had a similar experience and my spouse was about as organized and anal retentive when it came to keeping things on the home front squared away as anyone you might expect to meet. For the sake of brevity I'll spare you the details. Just about everything was in my name and because of the turmoil she was experiencing she lost control of the family finances and, as a result, a lot of bills stopped getting paid.

By the time I found out it was too late. My credit score was knocked back into the upper 500's. This was about 20 months ago. I took over the finances myself and have managed to get my combined credit score average up to just over 700. Not fun.

[loanstar]

Originally Posted by kcsvti2121

Firms are looking for discriminators because often the folks doing the hiring aren't really trained in the art of conducting an interview. It's just something they're asked to do once in a while over and above their normal duties.

Firms don't want to shell out the extra funds to get people who are qualified to inteview people even though to do so more than pays for itself. So the folks who are stuck doing the interviewing look for these so called character indicators.

bad credit doesn't necessarily show your character; some people get into these situations due to an illness, redundancy or other emergencies. that doesn't mean you'd be inefficient at your job.

[Pupart]

Originally Posted by lillyb

I agree, Diolla. My goal is to have a lousy credit score BECAUSE I quit borrowing money (the only way to keep a good credit score). I'm not going to stay in debt for the rest of my life just to have a good credit score. Guess I'd rather be giving the insurance company a bit more of my money to insure my paid-for car, and I'd be able to afford that because I quit the credit game.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
I agree with both of you.
I think the only reason some insurance co's are
checking credit scores is because it is just another way to gouge people.

USAA doesn't check credit reports to determine someones rate. I know because I asked when I got insurance from them.
Unfortunately, not everyone can be a member of USAA, but you may want to check.

[debtconsole]

I agree, Diolla. My goal is to have a lousy credit score BECAUSE I quit borrowing money (the only way to keep a good credit score). I'm not going to stay in debt for the rest of my life just to have a good credit score. Guess I'd rather be giving the insurance company a bit more of my money to insure my paid-for car, and I'd be able to afford that because I quit the credit game.