Bad credit can be a dark cloud hanging over your financial life. It affects everything from your ability to get a loan to the interest rates you’re offered. The real-world costs of that are major. Whether you want to buy a home, get a credit card, or secure a mortgage, a low credit score can cost you big time. One way to get an idea of how much bad credit costs you is by comparing what you might pay with a credit score of 500 vs. a score of 700. Here are some examples:
Home loans
When it comes to home loans, your credit score is one of the most critical factors lenders consider. A higher credit score usually means better terms and lower interest rates.
500 credit score
– Interest rate: with a credit score of 500, you might still get a loan, but the interest rates are significantly higher. You could be looking at an interest rate of 6-8% or even more.
– Loan amount and terms: lenders may also limit the amount you can borrow, and require a larger down payment to minimize their risk.
700 credit score
– Interest rate: with a score of 700, you’re more likely to qualify for a better interest rate, currently around 5.8-6.5%.
– Loan amount and terms: you’ll likely have access to higher loan amounts and more flexible terms. You also will likely have a lower down payment requirement.
Mortgage payments
The impact of your credit score on your monthly mortgage payments can be massive. For example, the cost difference for a $250,000 mortgage over 30 years:
500 credit score
– Interest Rate: 7%
– Monthly Payment: Approximately $1,629
– Total interest over 30 years: Around $336,641
700 credit score
– Interest Rate: 6%
– Monthly Payment: Approximately $1,498
– Total interest over 30 years: Around $289,550
The difference in total interest you’ll pay over the life of the loan can be eye-watering. With a lower credit score, you could end up paying nearly 20% more in interest alone.
Credit card interest rates
Credit card interest rates are another area where your credit score can make a significant difference. Here’s how the rates compare:
500 credit score
– Interest rate: you might be offered rates as high as 25-30%.
– Credit limits: you’re likely to get lower credit limits and fewer rewards.
700 credit score
– Interest rate: with a good credit score, you could qualify for interest rates as low as 12-18%.
– Credit limits and rewards: higher credit limits and better reward programs are more accessible.
Comparing costs
To understand what bad credit really costs you, let’s compare the interest paid on a credit card balance of $5,000 over a year.
500 credit score
– Interest rate: 28%
– Annual interest: approximately $1,400
700 credit score
– Interest rate: 15%
– Annual interest: approximately $750
In this case, a lower credit score means nearly double the interest paid over the same period.
Auto loans
Auto loans are another common form of credit where your score matters.
500 credit score
– Interest rate: 10-15%
– Loan terms: higher interest rates, and maybe shorter duration.
700 credit score
– Interest rate: 3-6%
– Loan terms: more favorable rates and flexible terms.
For a $20,000 auto loan over 5 years:
500 credit score
– Interest rate: 12%
– Monthly payment: Approximately $445
– Total interest: Around $6,700
700 credit score
– Interest rate: 4%
– Monthly payment: approximately $368
– Total interest: around $2,100
What it all means
A higher credit score can save you thousands, if not tens of thousands of dollars over your lifetime. Bad credit hurts not only the interest rates you qualify for but also your overall cost of borrowing money. The differences in what you’ll pay for mortgage payments, credit card interest, and auto loans highlight the importance of maintaining a good credit score.
How to improve your credit score
If you’re struggling with bad credit, there are steps you can take to improve it:
– Pay bills on time: your payment history is a significant factor in your credit score.
– Reduce debt: Lowering your credit card balances can improve your credit utilization ratio.
– Check your credit report: Look for errors and dispute any inaccuracies.
– Limit new credit applications: Each hard inquiry can temporarily lower your score.
– Brigit’s Credit Builder1 is an easy way to build your credit without extra debt.
1Impact to score may vary. Some users’ scores may not improve. Results will depend on many factors, including on-time payment history, the status of non-Brigit accounts, and financial history. Results show that customers with a starting credit score of 600 or below were more likely to see positive score change results. A monthly subscription is required; $14.99. Cancel anytime. Credit Builder loans are not available in all states.
