How Much is Your Credit Score Costing You?

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Do you know how much money your credit score might be costing you? If you have a good to excellent score, you don’t have much to worry about, but if your score is in the ‘poor’ or even ‘fair’ range, your jaw will drop when you learn how much money you’ll potentially be throwing away.

Most people understand, at least on some level, that your credit score can have a significant effect on your ability to buy a house, a car, and potentially rent an apartment. A really low score can conceivably affect your potential job prospects, depending on what field you’re working in. Even if you comprehend just how far-reaching the effects of your credit score are, do you fully grasp just how much money a lower score is going to cost?

Generally, the following guideline holds true:

781-850 = Excellent credit
661-780 = Good credit
601-660 = Fair credit
501-600 = Poor credit
Below 500 = Bad credit

FICO scores are calculated by pulling information from different areas of your financial history. Smart financial decisions as well as money mistakes are both taken into consideration when formulating your credit score. Your payment history (if you’ve had any late payments and how many), how much debt you carry in relation to your available credit and income (debt-to-income ratio), the length of your credit history, the number and types of credit you use, as well as any new applications for credit – all have an effect on your overall credit score.

Every lender may potentially have a slightly different credit score chart, but for the most part, if your score stays above around 760 or so, you’ll be eligible for the best interest rates everywhere. Want to buy a car or a home? With an excellent credit score comes an excellent interest rate.

The same holds true in reverse, as well. A credit score that falls into the ‘good’ range will grant you a decent interest rate, but not the best. Maintain a ‘fair’ credit rating (in the mid-600s), and you’ll likely still be able to borrow money, but at an incrementally higher interest rate. Poor credit? Qualifying for a substantial loan will be exceedingly difficult, and if you do qualify, your interest rate will be sky high.

Just How Much Money Will a Low Credit Score Cost Me?

Ok – imagine this. You’ve maintained what you consider to be a ‘decent’ credit score – around 650, give or take. According to FICO and most lenders, your score falls into the ‘fair’ category, which means you likely made a few poor money decisions in the past, along with some responsible choices, as well.

Let’s assume you decide to purchase a home, maintain a vehicle, and have several credit card balances that you make regular payments on. When you are approved by the aforementioned creditors, you’ll receive an interest rate that may seem reasonable. However, over the course of your lifetime, the interest that accrues at your rate can add up to a SIGNIFICANT amount of money.

How Significant?

If you’ve purchased an average home in New Jersey, you’ve likely borrowed at least $300,000. Buying a car every few years tacks on an additional $120,000 – $160,000 in borrowed money. With a ‘fair’ credit score, you’ll be paying out around $285,000 in interest alone!

Borrowing the same amount of money with a ‘good’ credit score, you’d pay somewhere around $239,000 in interest – a savings of $46,000. An excellent credit score would save you even more money in interest – around $70,000.

When you break it down like this, it’s really easy to see just how important it is to have a great credit score. The savings in interest alone should be enough to motivate you to take the necessary steps to raise your score as high as you possibly can.

 

 Image credit: Jason Rogers

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6 Responses to How Much is Your Credit Score Costing You?

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