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.
Buying a Car with Bad Credit
Interest might seem like a minor concern 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 applicants with credit scores of 700 or higher enjoy interest rates as low as 3%.
- They purchase a $10,000 car and obtain a 48 month loan.
- Each month, they will owe $221.34 for their car payment.
- At the end of four years, they will have paid a total of $624.48 in total interest for their vehicle.
- Car loan applicants with lesser credit scores must pay interest rates up to 12.9% – maybe more.
- They purchase the same $10,000 car with a 48 month loan.
- Each month, they will owe $267.78 for their car payment. That’s $46.44 more than the person with good credit will pay each month for the same vehicle.
- At the end of four years, they will have paid a total of $2,853.39 in 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.
- Top-tier credit scores can land credit card rates as low as 9.99%.
- The credit card user charges $5,000 worth of emergency expenses to their card.
- They pay the minimum each month, calculated as 3% of the balance, $150.
- It will take this credit card user 12 years to pay off the balance paying only the minimum, and they will have paid a total of $1,816.52 in interest.
- Bad credit score applicants will most likely not obtain approval for a credit card interest rate lower than 22.99%, and that is only if the credit score is at least 620. The rates go up to 36% as the credit score drops even lower.
- For $5,000 worth of charges and minimum payments set to 3% of the total balance, they will pay the same total per month – $150.
- However, it will take them 22 years – 264 months – to pay off the balance. Only paying the minimum will cost them $8,256.28 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:
- An applicant and co-signer team have a credit score that falls in the good to excellent range, qualify for a private student loan interest rate of 4%.
- They borrow $15,000 and plan to repay the money in 10 years.
- The monthly payment is $151.87.
- When the last payment is made, they will have paid $3,224.12 in interest, a total bill of $18,224.12.
- A bad or limited credit score may qualify the applicant for a higher private student loan interest rate of 12%.
- They borrow $15,000, repayable on a 10 year plan.
- The monthly payment is $215.21, $63.34 more per month.
- In total, the interest charges will equal $10,824.77 for a total loan 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:
- With a credit score of at least 760, mortgage interest rates can drop to 4.072 percent.
- The good credit applicant obtains approval for a $200,000 30 year fixed-rate mortgage.
- Their monthly mortgage payment will total $963.15.
- Once the mortgage is paid off, they will have paid a total of $146,734.36 in interest.
- Mortgage approval may be given to those with credit scores as low as 620, but the interest rate will increase to 5.661 percent.
- They also sign on to a $200,000 30 year fixed-rate mortgage.
- Their monthly mortgage payment will total $1,155.86. That’s $192.71 more per month than the person with good credit will owe.
- Once the mortgage is paid off, they will have paid a total of $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 vehicle.
- Charged $5,000 to a credit card.
- Obtained $15,000 in education loans.
- Financed a $200,000 mortgage.
But in the end, there was a major difference in total interest charges.
Good Credit Applicant
- Paid $624.48 interest on car.
- Paid $1,816.52 interest on credit card.
- Paid $3,224.12 interest on private student loan.
- Paid $146,734.36 interest on mortgage.
- Total: $152,399.48
Bad Credit Applicant
- Paid $2,853.39 interest on car.
- Paid $8,256.28 interest on credit card.
- Paid $10,824.77 interest on private student loan.
- Paid $216,110.56 interest on mortgage.
- Total: $238,045
Bad credit cost a total of $85,645.52 more.
How Does Your Score Match Up?
The average American has a credit score of 687. These score classifications are used by the major credit bureaus to rank and categorize credit applicants.
- Excellent Credit: 781-850
- Good Credit: 661-780
- Fair Credit: 601-660
- Poor Credit: 501-600
- Bad Credit: below 500
What Influences a Credit Score?
The following five factors matter most when credit bureaus calculate individual scores.
- Payment history: 35%
- Total Amount Owed: 30%
- Length of Credit History: 15%
- New Credit Inquiries: 10%
- Type of Credit: 10%