Cost of Bad Credit
Your credit standing can be one of your most important assets. Credit affects not only how much money you can borrow and how much you pay to borrow that money, but also may affect your ability to get a job or something as simple as affordable insurance rates. If you have good credit, you want to do everything possible to maintain that good standing. Even if you have bad credit, there are significant advantages to improving it that help to keep money in your wallet.
So, when do you have "bad" credit?
There is no single credit score that separates good and bad because lenders, employers, insurers, and others who use credit each have their own set of criteria. But, credit scores between 620 and 660 are typically considered borderline. And, according to MyFICO.com, a division of Fair Issac Corporation, the median credit score in the United States is 723. That means that 50% of Americans have a credit score above this number and another 50% have one below it.
Financial Impact of Bad Credit
Let's say that you have a credit score between 620 and 660. You could pay up to $500 more each month in credit and insurance costs versus someone with excellent credit. The breakdown**:
| Increased mortgage payments | $234 |
| Increased automobile payments | $72 |
| Increased credit card payments | $183 |
| Increased insurance premiums | $15 |
| Total Increased Costs | $504 each month! |
In the event that you have a poor credit score, one that is below 560, you could pay up to $1,000 more each month in credit and insurance costs versus someone with excellent credit. The breakdown**:
| Increased mortgage payments | $519 |
| Increased automobile payments | $149 |
| Increased credit card payments | $383 |
| Increased insurance premiums | $15 |
| Total Increased Costs | $1,066 each month! |
Sources of Increased Costs
| Mortgage Loans | Credit Score 620 – 660: Can pay an interest rate 1.75% higher than those with excellent credit. Credit Score Less than 560: Can pay an interest rate 5.5% higher than those with excellent credit. Just a couple of extra percentage points on a loan rate can add up to thousands of extra dollars over the lifetime of the loan. |
| Credit Card Lines | Credit Score 620 – 660: Can pay an interest rate 5% higher than those with excellent credit. Credit Score Less than 560: Can pay an interest rate 20% higher than those with excellent credit. In addition to higher interest rates, borrowers with bad credit can pay account maintenance fee in addition to the annual fees. |
| Automobile Loans | Credit Score 620 – 660: Can pay an interest rate 5% higher than those with excellent credit. Credit Score Less than 560: Can pay an interest rate 10% higher than those with excellent credit. Automobile manufacturers only extend their no interest or below market interest rates to well qualified borrowers. |
| Insurance | Credit Score Less than 620: Often don’t receive a 10% discount on their automobile insurance for low risk customers. |
Bad Credit Poses Additional Obstacles
But that's not all. Bad credit can also impact your ability to land a new job or rent a home or an apartment. Employers and landlords often check credit histories and reject applicants with lower credit scores.
You may also have to pay bigger deposits for telephone, electricity or natural gas service than someone with a higher credit score.
If you apply for a new credit card, home loan, or other form of credit, your application may be denied outright if you have bad credit and fail to meet the minimum criteria of the lender. Bad credit not only limits your ability to get more credit, but it can impact your ability to consolidate your credit card debt at a reduced interest rate to help you get out from under that debt.
Take steps to improve your score
The good news: even a slight improvement in your credit score can result in lowering the interest rate on your loans – which can help you put more money in your pocket instead of your lenders. If you have bad credit, take steps now to improve your score:
- Know your credit background and correct any inaccuracies as soon as possible. The three nationwide consumer reporting companies are required under a new Federal law, to provide you a free copy of your credit report once every 12 months. To request your free annual report under that law, you can go to www.annualcreditreport.com.
- Pay your bills on time. PennyMac offers an automatic payment options that deducts your mortgage payments every month. No checks, no stamps, no worries. Just fill out this short ACH application.
- Catch up on any missed payments and stay current.
- Pay down installment loans like car loans, and other balances to reduce the amount of open credit accounts with balances.
- Don't apply for new credit accounts unless you really need them.
- If you are having trouble making your payments, contact your creditors to work out a new payment plan. If you are a PennyMac customer and need help, contact one of our Loan Specialists.
* Your specific situation may vary from the examples presented in this article. You should view the additional costs of blemished and poor credit as directional because credit costs are impact by more than just your credit score.
** All examples assume $200,000 mortgage loan, $30,000 in automobile loans (2 cars), an $8,000 credit card balance, and $1,800 per year in automobile insurance premiums (2 cars).
