Why a Poor Credit Score Will Cost You Money

Posted on Thursday, September 10th, 2009 at 5:24 pm in Financial Planning

You might be surprised at just how expensive it is to have a below-average credit score. The lower your FICO score is, the more you’ll have to pay every month for everything from your mortgage to your car insurance to your credit cards. Over the years, this can add up to many thousands of dollars of extra money down the drain. This is why it’s so important to make an effort to boost your credit as far as possible.

The median FICO score is currently 723; in other words half the population’s scores are above that level, and half are below. The interest on just about all forms of financing (apart from student loans and payday loans) is calculated on the basis of how your score relates to that number. It can also impact your eligibility for a loan, especially if your credit score is far below the median.

If you’re like most of us, your mortgage is where you will see the biggest benefit of having a good credit score. Although general mortgage rates are currently at an all-time low, that doesn’t necessarily apply to all borrowers. This table shows the cost of taking out a typical 30-year fixed-rate mortgage of $200,000:
FICO Score Rate Monthly payment Interest paid over 30 years Additional cost of poor credit
720-850 5.922% $1,189 $228,072
675-699 6.584% $1,275 $259,074 $31,002
620-674 7.734% $1,431 $315,021 $86,949
560-619 8.531% $1,542 $355,200 $127,000

The borrower with good credit (a 720-850 score) pays $1,189 a month. This equates to $228,072 in interest (plus the $200,000 principal) over the whole 30 years. The borrower with a 675-699 score pays an additional $31,002 in interest over the term of the loan, while the person whose FICO score lies between 620 and 674 has to find an extra $86,949 compared with someone with a high score. The borrower whose credit score is only 560-619 and is seen as a poor credit risk has to pay $355,200 in interest to borrow $200,000 over 30 years, which is $353 more every month than the first borrower, or a whopping $127,000 extra during the life of the loan.

Similarly, if you take out an auto loan for, say, $20,000 for 48 months, a low credit score can cost you a lot of extra money. With a FICO Score of between 720 and 850, you might be able to get a 6.282% rate and pay $472 a month. Over the four-year loan term, you would pay a total of $2,670 in interest. If, however, your credit score falls in the 660-689 range, your loan might come with an interest rate of 8.844%. You would pay $496 a month, and $3,819 in interest over the 48 months. In other words, this lower score would cost you an additional $1,149, or $23.94 a month.

Nobody wants to throw away their hard-earned money. But that is exactly what you’re doing if you don’t do your best to maintain a high credit score.

Related posts:

1. 7 Credit Score Pitfalls
2. Payday Advances Without a Good Credit Score
3. A Cash Advance Can Cost You Less Than Bank Fees
4. Payday Loans Can Get Off the Money on Your Mind
5. Loans for People With Bad Credit