What Does A Low Credit Score Cost You?

You've probably heard that your credit score is what lenders use to determine whether you should be able to get a line of credit you've applied for. You might also know that they often use your ratings to determine how much that account is going to cost you. However, what you might not know is just how much more you could end up paying for many things in your everyday life if your credit isn't as good as it possibly could be.

Millions of Americans apply for credit every year and likely get terms a little less affordable than those available to consumers with top-notch credit ratings, while others might be denied altogether because of the mistakes they've made in handling their accounts in the past. Those who are approved miss out on the lowest rates and fewest fees, meanwhile, will likely pay more than $4,000 extra per year just to maintain their various accounts, according to a report from Credit.com. Even if you have a minor need for credit repair — such as if your credit is best described as fair, rather than good or excellent — you could see your costs soar.

Why being as good as possible matters
Data from Experian shows that the average interest rate a person obtaining a $26,500 auto loan will pay if they have excellent credit is just 2.64 percent, less than half of the 6.14 percent granted to those with fair credit, and down appreciably from the 9.42 percent for those whose credit is poor, the report said. That means that the average monthly payment for the first person would be more than $40 less than those for the second, and $80 from the third. Over the course of the year, that adds up to savings of more than $500 and $1,000 per year, just on your car payments.

Likewise, insurance costs can skyrocket if you have fair or poor credit compared to if your standing is excellent, the report said. The added costs here are slightly lower, at about $435 and $932 per year, respectively, but when combined with your added auto loan payment costs, that's as much as $2,000 per year in extra money you're contributing to owning a car just because you let your bad credit stand as it was before you applied for financing and insurance coverage.

That doesn't even get into the far more appreciable added costs brought on by mishandling your borrowing when it comes to credit cards, the report said. When you have excellent credit, your card's APR would be an average of 10.9 percent, less than half of what you would face if you had fair or poor credit; the drop-off in value in those terms is rapid once you no longer have good credit, and there's little difference between the average rate granted to those with fair credit (19.8 percent) and poor credit (22.99 percent). And the savings on those accounts, if you have a balance of about $3,000 is huge. Your interest payments under an excellent-credit account would come to $327 per year, but balloon to $594 for fair credit and $689 if your standing is poor.

Likewise, if you have a mortgage, you can pay as much as an extra $169 per month if you have poor credit, or $41 a month if you have fair credit, the report said. Over the course of a year, that might be relatively little compared with the cost of your loan, but when you do the math for all 30 years the standard home loan lasts, that grows to $14,750 in added costs for fair credit borrowers, and $61,000 more for those with poor credit.

What can you do?
If you want to start building your credit rating to the point where you can qualify for the best possible loan terms available on any account you may want, the two easiest ways to do it are to make sure every bill you have is sent in on time and in full, which will help to build a strong payment history, and that alone makes up 35 percent of your score. And if you increase the value of those payments, and thereby reduce your debts more quickly than in the past, you will likewise cut your "credit utilization ratio" (the amount you owe versus how much your account maximums come to), which comes to another 30 percent of your score. Coincidentally, if you want to maximize this part of your rating, you'll need to keep your debts below 30 percent of your limits.

Finally, you might also want to check your credit reports, because doing so will likely allow you to see where you stand and determine whether you have any unfair markings dragging down your ratings. If any such entries are discovered, working with a credit repair company may help put you back on the right track to strong credit.

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