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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:
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<b>Mortgages</b>: 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.
<b>Auto Loans</b>
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.
<b>Credit Cards</b>
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.
<b>Insurance</b> 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.
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:
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<b>Mortgages</b>: 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.
<b>Auto Loans</b>
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.
<b>Credit Cards</b>
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.
<b>Insurance</b> 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.
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