Bad credit causes problems you expect – you can be turned down for financing, jobs, and even rental property. Everyone knows poor credit holds you back but did you know that mediocre credit can be almost as problematic and can cost you tens of thousands of dollars? Look at the high cost of low credit and what you can do about it.
Declined Isn’t the Worst Outcome
You might think that being turned down for credit (like when you need a car loan) is the worst thing that can happen. That’s not true. Being approved for a finance agreement that’s got terrible terms is a worse fate. If a lender rejects you for a loan, you can make alternate plans, save up money, build up your credit score, and try again later.
But if you get into a bad deal, you might wind up with excessive interest, missed payments, and wind up losing the vehicle or home to repossession or foreclosure. Even if you can stick to the finance agreement, if the terms are tough, you’ll pay thousands of dollars more in interest, fees, and finance charges than you otherwise would with a better credit score.
The High Cost of a Low Credit Score
Most people are surprised at the financial impact of a mediocre credit score. A recent study by financier Lending Tree revealed that an average credit score could cost you up to $45k over the long haul depending on your credit activity. If you ever wondered exactly how much a too-low credit scores costs, this survey provided meaningful insight.
Lending Tree looked at credit scores rated “fair” (580-669) versus “very good” credit scores (740-799). They then examined the impact of the credit score differences on credit cards, personal loans, auto loans, mortgages, and student loans. Here is what they observed:
- Credit cards – Over the life of your credit activity, with fair credit, you’d pay nearly $6k more in interest than someone with very good credit.
- Personal Loans – With personal loans (most often used to consolidate credit card debt), the observed difference of interest was close to $4k.
- Auto Loans – For vehicle loans, the difference between fair and very good credit could cost you almost $4k more.
- Student Loans – Over the 10+ year period you pay off student loans, less than stellar credit can cost you almost $2k, but that’s usually on private loans, not federal.
- Mortgage – The biggest dollar hit for fair credit versus good is on a home loan where you’d pay $29k more in interest for your house.
If you add all those numbers up, it’s more than $45k you’d lose by not having better credit. You might think you’re stuck with mediocre credit, but you’re not. Nothing is holding you back from improving your score. Even with a lower income, you can have a higher score if you strategize.
How to Improve Your Credit Score
To get to a “very good” credit rating Is not an overnight process. Some steps to take to drive up your credit score include:
Pay your bills on time.
Good payment history will improve your credit report and boost your credit score. Payment history makes up a large chunk of your credit score calculation, and even one late payment can tank it.
Keep older accounts open.
When you have an older account in good standing, why shut it down? If you think fewer cards in your wallet is better, it’s not necessarily true. Older accounts boost your average age of credit.
Maintain a low credit utilization.
Forget the 30% myth. The fact is, you should not carry balances on your cards from month to month. You’ll pay more in interest, and it’s a slippery slope. Pay off in full each month if you can.
Apply for new credit cautiously.
New credit can boost your score but go after too much at once, and you can drag down your average age, and excessive credit inquiries (i.e., hard pulls) can also drag down your credit score.
This research shows you the hard dollar difference that is having a better score can make to your finances. You need good credit – but how can you get there? Get started by checking out Credit Score Keys.