It doesn’t take being a financial savant to know that bad credit costs you. From interest rates to loan offers to insurance premiums, your credit score plays a role in whether and how much you can borrow as well as how much it costs to pay loans back or even receive services in the first place. However, what many consumers fail to realize is that bad credit scores cost more than just dollars and cents, learn more about how to navigate in rough financial times and secure your business finances by getting help from an HMRC Debt management. Bad credit is like a plague, it follows you everywhere and can impact all aspects of your life from where your live to how much money you make. In fact, a poor credit score can seriously impact your overall financial and physical health in at least three ways:
- Higher Interest Rates
- Higher Insurance Premiums
- Job and Home Availability
Understanding these effects is step one in getting yourself set to improve and maintain your credit score. Indeed, once most people learn that more than their finances are at stake, rescuing poor credit scores to get onto the path of financial health is that much easier.
Bad Credit = Higher Interest Rates
Most people understand that those with lower credit scores get higher interest rates on everything from credit cards to home and auto loans. However, most fail to understand the real impact that those few percentage points can have over the long term.
Take a look at the following comparison of two fictitious homeowners who each take a $200,000, 30-year, fixed mortgage loan:
| Homeowner #1 | Homeowner #2 | |
| Credit Score | 760 | 650 |
| Interest Rate | 3.8% | 4.9% |
| Monthly Payment | $931.91 | $1,061.45 |
| Yearly Mortgage Paid | $11,182.92 | $12,737.40 |
| Interest Paid over Lifetime of the Loan | $135,489.29 | $182,123.24 |
While these numbers are simplified, it’s clear to see how people can write off the effects of bad credit on their loans since, at the monthly level, the difference between payments is small – only $129.54. However, that adds up to over $1,500 of extra costs per year or a shocking $46,633.95 over the 30-yar lifetime of the loan. Without even considering what else you could buy with that $46,000+, that’s a whole lot of money to spend on the same home as someone with better credit would.
What makes these figures even more disturbing is that in many markets like New York, Los Angeles, San Francisco and Washington D.C. a $200,000 home loan is unlikely. Median housing prices in these areas are more than twice that, leading to nearly $20,000 in added interest payments over the course of just five years using the figures above.
Furthermore, there is an opportunity cost associated with spending all this extra money on interest. Using even a modest investment model which assumes a 4% gain over the course of that 30 years, that extra $46,000, invested at a rate of about $130 per month or $1,500 per year would add up significantly, nearly doubling to more than $87,000. At a 6% interest rate, that figure climbs to nearly $125,000.
Bad Credit = Higher Insurance Premiums
In addition to lousy interest rates on loans, people with bad credit pay more for other common bills such as insurance premiums and utility costs. Others are forced to pay deposits and fees to compensate for the risk that these companies take for doing business with them.
Does this seem fair? Maybe, maybe not, but there is logic behind companies making these decisions, which can add up to hundreds of dollars each year. In fact, a study by Consumer Reports found that the difference in auto insurance rates paid by those with a “good” credit score as opposed to those with an “excellent” one ranged from $68-$526 more per year on just a single driver plan.
The bottom line is this: any insurance company who wants to make money knows that it needs to take in more money in premiums than it pays out. Therefore, it needs to balance what it charges customers with the claims they are likely to make, and this is all just a function of math. Basically, experience and statistics have shown insurers that people who mismanage their finances are more likely to crash their car and mismanage their health. As a result, these individuals are more likely to file claims on their insurance, so they must pay a higher premium.
Whether or not this is true for you specifically is irrelevant. It’s the same reason that young men pay higher premiums on even the best car insurance than other demographics. Statistically, they are more likely to crash.
However, unlike your age and gender, bad credit is something you can control.
Bad Credit Changes Where You Live and Work
The final cost of bad credit is much harder to put into numerical terms since it relies heavily on other factors, specifically the weight that credit score plays in an individual or company’s decision making process. However, for years, and specifically ever since the market crash of 2007/8, both landlords and hiring managers have made it standard practice to run a credit check on potential tenants and employees.
Why?
Just like insurance and utility companies, these businesses assume that failure to maintain a healthy financial life will lead to mismanagement in other areas. When it comes to paying rent, this makes sense. From an employment standpoint, its debatable, especially if your credit problems resulted from job loss or a sustained illness or injury. Unfortunately, some people and places simply do not care.
These decisions, based on your poor credit score, in turn impact every aspect of your life from how much money you earn to where you live and where you kids go to school to who your friends are. It’s sort of a constantly-repeating cycle of bad choices leading to bad environments where you make more bad choices.
The only way to break the cycle is by rescuing your bad credit score or maintaining your good one.
The Real Cost of Bad Credit
No two people use credit in the same way. In fact, how and when you use your credit and how you maintain it is actually a science unto itself – and it has a name, your credit appetite. Because of these differences in human nature and situations, putting a solid figure on the “cost” of having bad credit is imprecise at best. Plus, as you have already seen, there is more to the cost of bad credit than dollar amounts alone.
Regardless of this, the fact remains that having bad credit will impact your life in a negative way. And even though you might not always feel that strain as tightly as the numbers and situations we’ve discussed have shown, fixing and then maintaining a good credit score is the not only a way to ensure that your finances are in order, it may just as well improve other aspects of your life as well.
