True Cost Of A Bad Credit Score
Have you taken the time to investigate the true cost of having a bad credit score?
Often times people believe that having a bad credit score will only result in less attractive credit card offers or slightly higher interest rates on their credit cards.
However, having a poor credit score can impact you in many other financial situations such as when trying to secure a loan for a new vehicle or a mortgage on a new house. With a poor credit score, you will likely still receive approval for your loan but it will come at a much higher cost than if you had a good credit score.
Impact of Bad Credit Score
To see the impact that a bad credit score can have on the cost of a mortgage, consider the following example with two couples that are looking to buy their first home.
For purposes of this example, let’s assume that both couples are looking at a 30-year, fixed rate $150,000 mortgage.
- Mr. and Mrs. Good Credit have a credit score of 730. Due to their good credit, they qualify for a rate of 6.0%, with monthly principal and interest payments of $899.93.
- Mr. and Mrs. Bad Credit have a credit score of 560. As a result of their poor credit score, they are only able to obtain a loan with an interest rate of 8.5%, making their monthly principal and interest payments $1,153.37.
Due to their poor credit score, Mr. and Mrs. Bad Credit will be paying more than $250 extra per month than Mr. and Mrs. Good Credit. In this example, having a bad credit score would cost you over $3,000 more per year than someone with a good credit score for the same loan amount.
Using the numbers in this example, that would translate to a difference of $91,456.00 over the full term of the mortgage. That is a very high price to pay for mismanaging your credit and is one that many people with poor credit do not take the time to understand.
What You Can Do
If you find yourself resembling Mr. and Mrs. Bad Credit more so than Mr. and Mrs. Good Credit, it is not too late to begin working on improving your credit score.
For more suggestions on what you can do to improve your credit score, please take a look at the following:
- 5 Steps To Improve Your Credit Score
- Should I Close My Credit Card After Paying the Balance?
- Credit Score and the Importance of Payment History
- Use Low-Rate Balance Transfers to Your Advantage
Please feel free to ask any questions you have regarding the steps needed to improve your credit score.