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Why Good Credit and You know that bad credit and a low FICO score costs you money, but you probably don’t know just how much. Over time, low FICO scores can add up to more than one million dollars of extra cost! People with poor credit pay more for mortgages, car loans, credit cards – even insurance. Over a thirty-year period, people with low FICO scores will pay hundreds of thousands of dollars more than people with good credit and high FICO scores pay – and if you were to invest that money, instead of paying higher interest, you could easily be talking about an extra one million dollars in your pocket. Here’s how low FICO scores cost you: MORTGAGE One obvious place where low FICO scores impact you is the interest rate you pay when you buy (or refinance) a house. The average price for a home in June 2007 was $316,200. According to MyFico, a 30-year, $300,000 loan for someone with a score of 760 or above carried a 6.346% APR. Someone with a credit score between 500 and 579 would have a 10.152% APR. That would mean a person with a good score would have a monthly payment of $1,866, while the person with the poor credit score would pay $2,666 – or $800 a month more for the same house. That adds up to $288,000 over the 30 years of the loan.
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AUTO LOAN
Edmunds.com says that the average car loan is $24,864. According to MyFico, an auto loan for a person with good FICO scores (defined as 720 or above) would carry a 7.221% APR, while someone with low FICO scores (a score between 500 and 589) would have to pay a 14.90% APR. That works out to a difference of $88 a month, which comes to $3,168 over the three years of the loan. The average person keeps their car for 4.5 years.
That means if each person financed a new car every five years, it would cost the person with low FICO scores $19,008 more in car financing over 30 years than someone with good credit.
CREDIT CARDS
The median credit card debt in the USA is $2,200. Over the course of 30 years, if a person with high FICO scores credit has an interest rate of 9% and a person with bad credit has a credit rate of 20%, the person with low FICO scores will pay an extra $7,260 over a 30 year period.
LOST INTEREST
If the person with good FICO scores took the difference and invested the money in an account that earned 8% compounded annually for 30 years, he or she would have well over a million dollars saved! In fact, investing the $800 difference in the cost of the mortgage alone would be worth $1.2 million!
INSURANCE
All types of insurance (auto, health, homeowners) will likely cost more for a person with a low FICO score than one with a good FICO score. Insurance companies know that people with poor credit make more claims than those with good credit – and therefore are more of a risk to insure.
If your credit score is taken into account on any of your insurance rates, an individual with a low score will pay more than a comparable individual with a high score.
JOB
You may lose out on a better job due to a low FICO score. More and more employers pull your credit report when you apply for a job, because many see a risk in an employing a person with a low FICO score. The same can be true with promotions. For example, people in the armed forces may not be able to get clearance for classified documents and areas due to low credit ratings, therefore blocking potential advancement. The same is true in the private sector: How would you feel if you lost your dream job because of a poor credit rating?
HOUSING
Many apartment managers will run a credit check on prospective tenants. If your FICO score is low, you may be denied a unit due to the risk that you may not be able to pay.
DEPOSITS
If you have a low FICO score, you may need to leave a deposit – or larger than normal deposit – with certain companies than would be the case if you had a high FICO score. Rental units, utilities, and cellular phone companies – to name a few – sometimes ask for deposits, or larger than normal deposits, with people that have less than stellar credit.
HEALTH
In addition to all the financial aspects where a credit rating can hurt you, it could also adversely affect your health. It’s not difficult to imagine that a person who has to pay a couple of hundred thousand dollars more for the same house as a neighbor down the street could have some financial stress in their life. The trend is only growing stronger. Take the time to make the effort to keep your credit in good standing. It will pay off with more money in your pocket and less stress in your life.
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