How Much Does a Bad Credit Score Really Cost You?
Unfortunately, according to recent research , the difference between an exceptional and a bad credit rating can cost you almost $ 400,000 in your lifetime. This effect is much less exaggerated between exceptional and fair credit ratings, but even so, paying interest can cost you tens of thousands of dollars. Here’s more details on how much credit ratings can cost you throughout your life.
Mortgage Interest Could Eat Your Decade Of Earnings
According to a new study by financial technology company Self , the average American will pay about $ 130,461 over the course of his life in interest fees. The distribution by FICO credit rating is as follows:
- Less than 620: $ 486,040
- 620-639: $ 158,512
- 640-659: $ 133,828
- 660-679: $ 114,803
- 680-699: $ 105,291
- 700-759: $ 98,045
- 760-850: $ 88,388
As Balance points out , the interest earned on the lowest credit ratings is 9.4 years of the average full-time employee’s wage. Why is this effect so exaggerated? Well, since borrowers with a credit rating below 620 cannot qualify for regular loans, they are forced to take out subprime mortgages with much higher interest rates, which ultimately costs them much more. This is why it is so important that your credit rating is above 620 and then apply for a mortgage.
Subprime Car Loan Interest Could Cost You Annual Income
The study also looked at the lifetime cost of car loan interest (based on the average lifetime prices of two used cars and four new cars and the corresponding interest rates). The distribution by FICO credit rating is as follows:
- 300-500: $ 87,523
- 501-600: $ 65 $ 549.
- 601-660: USD 39,031
- 661-780: US $ 20,937
- 781-850: $ 14,545
What’s interesting here is that even with a decent credit rating, a difference of 100 points in your credit rating will result in interest payments that are roughly equivalent to the annual salary for a part-time job.
Credit cards are a little harder to measure
Credit cards are different because they are revolving credit loans and not installment loans as you see with mortgages or auto-financing. For this reason, it is not easy to measure the average lifetime interest based on a borrower’s credit rating. There are other reasons for this as well: borrowers usually need a credit rating above 670 to be eligible for a credit card, and many borrowers make timely payments before interest starts. According to CNBC , the average credit card interest over the life is $ 9,624.24. …
How to improve your credit score
Even borrowers with the worst credit rating can slowly restore it over several years , but this requires good credit behavior during this time. If your credit score is at the bottom, check out this Lifehacker post, which outlines your options for building a good credit history from scratch.