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How a Bad Credit Score Can Hurt You


While a credit score may seem like an arbitrary number, calculated by an invisible credit agency with no real bearing on your life, the truth is a low credit score can cost you thousands.

As lenders continue to implement more aggressive qualifications for loan approval, consumers must be diligent in maintaining or improving their credit history and credit score.  What may have been considered a good score a few years ago, simply will not do the trick in today’s economy if you are shopping for a loan.  In some cases your credit may be good enough to qualify for a loan but at higher interest rates.

To get an idea of just how much money you can lose due to bad credit, take a look at the following examples:

Credit Cards

If you have a low credit score, you will not be eligible for prime credit cards. These cards have the best interest rates, payment terms and credit limits. They make it easier for you to maintain good payment history, thus further establish good credit.

Consumers with a low credit score qualify for less attractive credit cards or "sub-prime" cards. These cards often require exorbitant fees, monthly fees, low credit lines, or cash deposits. In most cases, these cards are difficult to maintain, often fail to record positive payment history on your credit reports, cost you money, thus making it very difficult for you to improve your score.

The biggest credit card trap by far, however, is the high cost of credit card minimum payments. By paying only the minimum amount owed, borrowers often spend years, if not decades, in debt and pay hundreds, if not thousands, of dollars in interest.
As an example, consider a $5,000 balance on a credit card with an 18% interest rate. If minimum payments of 3% of the outstanding balance are made, the debt will be paid off in 16 years with interest charges of $4,567 (total debt repayment of $9,567). If the monthly payment is 6% of the outstanding balance, the debt would be paid off in 7 years, instead of 16, with an interest cost of $1,592 (i.e., interest savings of $2,975 compared to 3% payments).

Car Buying

When trying to buy a car with bad credit, you will not qualify for the lowest interest rates available. This often translates to $4,000 to $8,000 more in interest payments costing you slightly higher monthly payments. While it may not seem like a lot on a month by month basis, when calculated over the life of the loan, it will be a sizable amount.

For example: A loan for $29,000 to be repaid over 5 years:.



Home Buying

As you might imagine, the effects of bad credit are most evident when you have large purchase, such as of a home. For most people, a home is the largest purchase they will ever make. If you have a poor or bad credit score, you may end up paying between $2,000 and $3,000 of interest a year over the course of the loan, which can amount to $60,000 and $100,000 more in interest than if you had an excellent score. Please click on MORTGAGE SAVING CALCULATOR   and see how much a poor credit score can cost you on your mortgage.

For example: A $200,000 mortgage to be repaid over 30 years: