How Much More Expensive Is It To Have A Bad Credit Score?

Most people know that having a less-than-perfect credit score makes it more difficult to get a loan. And for those who can manage to be approved for a loan or new credit card, it also means they will end up with higher payments.

The folks at SmartMoney broke down the negative impact of low credit scores by the three main lines of consumer credit — car loans, credit cards, and mortgages.

For car loans, someone with a credit score of between 680 and 739 will likely pay 4.5% APR on their loans, compared to only 3.2% for people with scores above the 740 threshold. Meanwhile, people with sub-680 scores can pay anywhere from 6.5% to 12.9% APR for the same loan.

Over the course of a five-year loan for $10,000, that 4.5% interest rate results in an extra $5.85/month on the monthly payment and about $351 more over the life of the loan.

That may not be too huge a difference, but for people at the top end of the subprime auto loan market will pay an additional $46/month, which adds up to an additional $2760 over the five years.

This might be of little concern to you, but sub-680 auto loans make up nearly half of new car loans, so that means there are a lot of people out there paying oodles of extra interest.

When it comes to credit cards, the difference is even more pronounced. Card holders with scores above 720 pay 12.9% APR on average, but those with scores ranging from 660 to 719 pay 17.1%. For people with scores between 620 and 659, that average is 20.3%.

So if you have two people each paying down a $5,000 credit card bill at $150/month, the person with 12.9% APR pays $1,235 in interest while the person with 20.3% APR will pay almost double that — $2,421 — in interest.

And then there are mortgages, where getting approved for a loan with tarnished credit is a huge hurdle. But for comparison’s sake, SmartMoney provides this example:

Borrowers who have FICO scores of at least 760, make a 20% down payment, have a $300,000, 30-year mortgage, and pay one point upfront (that equals one percentage of the mortgage amount) will have average annual percentage rate of 3.3% or about $1,311 per month, according to Informa Research Services. On the other end of the spectrum, those with 620 to 639 scores – if they can get approved — will pay 4.9% on average or $1,587 per month – and annually will pay $3,312 extra per year.

The High Cost of Low Credit Scores [SmartMoney.com]

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  1. bnceo says:

    Seeing this info before is what really motivated me to start doing the snowball and lowering my debt. It’s throwing money away and if worse comes to worse, you could have massive debt if you lose your job. While the going is good, gotta make sure your liabilities are pretty close to zero.

    As a person who had no credit really when I bought my car, my interest rate was 9% on a 6 year car loan. So high, but my previous car broke down on me and I needed something quick to get to work.

    • sponica says:

      when I was calculating my annual expenses, I noticed than about 9k (about a third of my income) was unaccounted for…then I realized if I paid off my freaking credit cards, I’d have 9000 more dollars a year.

  2. dolemite says:

    Aha..and that’s why they take your lowest score when pitching loans at you, even if your other 2 scores are like 775.

  3. Loias supports harsher punishments against corporations says:

    I’ll tell you it feels damn good to price a loan and are told you’re in the top tier for interest rates. Damn good indeed…

    • Applekid ┬──┬ ノ( ã‚œ-゜ノ) says:

      Damn it feels good to be a gangsta

    • Dirk Daring says:

      Yeah, you must love debt. I don’t. I’ll stay debt-free and not caring what my FICO score is, thanks.

    • Darkneuro says:

      +1 internets, Loias. Means you pay less when you do have debt…

  4. eccsame says:

    “So if you have two people each paying down a $5,000 credit card bill at $150/month, the person with 12.9% APR pays $1,235 in interest while the person with 20.3% APR will pay almost double that — $2,421 — in interest.”

    I’m guessing that the person with the 780 credit score isn’t carrying much of a month to month balance.

    • OutPastPluto says:

      The person with the 780 credit score is not paying the minimum. This is one of those little tricks that boosts your FICO score. Pay at least 3x of the minimum.

    • Nigerian prince looking for business partner says:

      The strange thing is, to have a high FICO you actually need to carry a balance on revolving credit month-to-month. The key is to keep your overall utilization somewhere between 1 – 9% of available credit, without too much on a single line.

      • George4478 says:

        I don’t believe your assertion is correct. I haven’t carries a balance on a credit card in years and my FICO is just over 800.

        I use each of my credit cards at least once a month and pay them all off. I have no idea what their interest rates are — I never paid any interest on any of them.

        • Nigerian prince looking for business partner says:

          It’s just one of those tricks to bump up a credit score.

          You don’t need to do it if you pay off you card after the statement cut date, since the credit report will reflect the balance at the time of the statement. If you consistently pay off cards prior to the statement being cut, it’s generally possible to get a slight bump in score if you do show some utilization.

          It’s one of those rules that don’t necessarily apply to everyone but is pretty widely accepted. Somewhere, buried at myfico.com is a scorecard that gives some of the rules of thumb.

          • pentium4borg says:

            This comment is correct, but your earlier assertion that you have to carry a balance to have a good score is false. Yes, you should wait for the statement to arrive before paying the bill, but that is absolutely not the same as carrying a balance.

            • Nigerian prince looking for business partner says:

              I just worded it poorly.

              To completely maximize your FICO score, you generally need to show some kind of utilization. In practice, anything over a 800 is going to be treated the same, so the difference between a 800 and a 810 is irrelevant.

              If someone is right on the threshold between prime & sub-prime, the little games can make a much bigger difference.

        • Rebecca K-S says:

          Yeah, exact ditto for me. Only carried a balance once, by accident, and I’m over 800.

      • Wawa says:

        Paying-in-full while using your card continuously means you card will always have a balance. How?

        Say your charges average $500/week like me. After paying the previous month’s statement 14 days after it is due (within the grace period means zero interest), you’ll still have a $1000 balance in the current billing cycle.

        • Nigerian prince looking for business partner says:

          It all depends on the date payments were made vs. the statement cut date. It’s entirely possible to pay cards off in full, yet still have a significant balance be reported the CRAs.

          This has been an issue for us because we have a very good reward’s card, with a somewhat low limit. If we don’t time things well, even though we pay off the entire balance, it’s possible it might report as a 75% utilization when FICO are calculated.

    • qwickone says:

      You don’t have to carry a balance, you just have to show utilization. Since your credit card company reports on a random day of the month, if you use your card regularly, you’ll have utilization.
      I ascertained thism this way: I never carry a balance (meaning I pay off every month), but when I pull my credit report, each card I use shows a balance that is neither my current balance nor any of my balances over the last several months.

  5. Such an Interesting Monster says:

    Yet if what you have to pay extra every year is but a fraction of what it would take to pay off your debt and keep a good credit score, well, then you come out ahead don’t ya?

  6. homehome says:

    I’m doing some credit fixing myself, I had two bad marks that are coming off early next year which is great, should try to get them removed now which will help me tremendously. I’m starting my kids on credit very early, probably 14 or 15 with a secure card.

    • bnceo says:

      I have one bad mark in which I simply forgot to pay a month of my student loans, which was such a tiny amount. Just simply forgot and didn’t do budgets or calendars then. And I had the money to pay for it fully, which I did the next month.

      It’s just so weird so see in my credit reports in that it shows the YELLOW for the late payment, but the next month is a green (good payment) and that was the last one I made. Anything I can do to clear that up or do I have to wait the 7 years?

      • FatLynn says:

        You can ask the student loan company to undo it, I think.

      • Such an Interesting Monster says:

        I wouldn’t sweat it. Really, it won’t have much of an impact, if any. And I think innocuous stuff like that is only on there for something like 2 years or less.

      • Nigerian prince looking for business partner says:

        Write a letter to the original creditor explaining the situation and ask them to remove the derogatory tradeline early. Keep the letter short, polite, and to the point.

        There are some very good threads/templates on the subject here: ficoforums.myfico.com

        If it’s a single blemish and you’ve been otherwise on-time with payments, you stand a very good chance in having it removed.

  7. Blueskylaw says:

    “How Much More Expensive Is It To Have A Bad Credit Score?”

    It’s sooo expensive, that I now have to look over the top of my
    glasses to keep from wearing them out.

  8. CrazyEyed says:

    In an era high with unemployment and foreclosures I can see the trend for people with low scores lasting a while. This is reality and unfortunately, not all low scores are a result of someone managing their money poorly. Sometimes you can’t predict a job loss and you can’t also fault them either if they don’t have enough money in savings to take care of the mortgage 3, 6, 9 months into unemployment. The only ones truely benefitting from people with poor credit scores are the companies collecting interest. The high interest rates will more than make up for the money they make from those who default.

    • aleck says:

      I can understand that for many people, it is not their fault that they lost their jobs. However, I’d like to point out that credit score is an indicator of their ability to repay debt. If they lost their job, their ability to repay debt is low. If they had saved enough emergency fund to stay afloat for six month, then they would be likely to recover from a job loss without a big credit score hit. This is all a part of money management. So, I’d say that the score is serving its purpose.

  9. Extended-Warranty says:

    I don’t think I know anyone personally who understands how their credit is scored

    • Such an Interesting Monster says:

      Actually, it’s a well-guarded secret. Only Suze Orman knows…

      • Germanovsky says:

        Here’s a breakdown of the five elements of the FICO score:

        1. Payment history: 35% of the total credit score is based on a borrower’s payment history. According to FICO, past long-term behavior is used to forecast future long-term behavior. FICO keeps an eye on both revolving loans — such as credit cards — and installment loans, such as mortgages or student loans.

        2. Debt amounts: 30% of the total credit score is based on a borrower’s total outstanding debt. Revolving lines of credit, which allow a consumer to borrow as much or as little as desired up to a limit are more heavily weighted. Credit cards are a type of revolving account. That 30% rule of thumb applies to each individual credit card as well as the overall level of debt.

        3. Length of credit history: 15% of the total credit score is based on the length of time each account has been open and the length of time since the account’s most recent action. A longer credit history provides more information and offers a better picture of long-term financial behavior.

        4 and 5. New credit and credit mix: Each comprises 10% of the total credit score. FICO suggests that borrowers only take on additional credit when they must have it or when it makes sense financially. Credit mix, meanwhile, is somewhat of a vague category, but experts say that repaying a variety of debt indicates the borrower can handle all sorts of credit. According to FICO, historical data indicates that borrowers with a good mix of revolving credit and installment loans generally represent less risk for lenders.

    • 401k says:

      The factors are quite common: number of accounts, age of accounts, payment history, balance to credit ration, payment history are some basic things that effect your score. How they quantify each aspect and calculate the overall score is a secret that disappeared with Amerlia Earhardt.

      On a side note, I heard Chuck Norris has a 940 credit score.

    • Extended-Warranty says:

      Guys, I never said I didn’t know

  10. photozz says:

    I really don’t give much of a damm about my score right now. No credit cards, no car loan and I plan on staying in my house for years yet. I don’t have any real reasons to take out a loan of any kind. Someone might make an argument about what I might do in case of emergencies, but that is what the emergency fund is for. When/if I need to sell the house, I can clean up my score in a few months.

  11. RobinB says:

    Try applying for credit at a small community bank. I work for one and we don’t base our rates on scores.

    • jeb says:

      For credit cards, I’ve noticed that at least some outsource that to another company, or simply don’t offer that service. They’re just too small to be able to offer it in-house.

      But yes, for car loans, mortgages, and even open lines of credit, small community banks can be good options, especially for those with no credit, as they will do more than just look at your credit score.

    • Nigerian prince looking for business partner says:

      Credit history isn’t taken into account at all, or is it just that FICO scores aren’t used?

    • George4478 says:

      What do you base your rates on? I’m a better credit risk than the guy making $40,000, has 2 car payments, and owes $150,000 on 17 maxed-out credit cards. My credit score is over 800; his doesn’t have 3 digits.

      We both want a new car. Do I get a better rate?

  12. jeb says:

    The average APR for credit cards for high credit score holders is 12.9%? Somehow I doubt this, unless you factor in cash rewards cards (or other cards that are marketed more for rewards than interest rates). In that case, I doubt they’re using those cards to carry a balance.

    My credit score is lower than that (under 700) and my APR is 11.9% on my credit card. It’s even a “rewards” card (granted, the rewards that I have any chance of earning enough points for are basically just little trinkets, but $32,000 worth of points would earn you a free US flight, I believe.) Granted, this is also through my credit union, but I’m not complaining. =]

    • dolemite says:

      I’ve got a pretty good score, and my rates are 19% (for a big “rewards” card), 12% (for a medium “rewards” card, and 8.9% (for a crappy rewards card).

      The 12% was less before the CARD act. It was raised in response to it. My 8.9% card was awesome, until they slapped on like a $69 per year fee out of the blue after the CARD act.

    • Loias supports harsher punishments against corporations says:

      Depends on if it’s a CU or a bank as well. I can’t get under maybe 18% on my bank credit card, but have 11.9% on my CU card. My credit score is rocktastic. Banks are just jerks.

    • who? says:

      A lot of people with outstanding credit don’t run a balance, so they choose credit cards based on factors other than absolute lowest interest rate. No fee, cash back, rewards, foreign exchange rate, warranty extension, etc, are all more important if you never run a balance.

  13. Jane_Gage says:

    “Pay one point up front.” ?

    • Loias supports harsher punishments against corporations says:

      Mortgage lingo: you pay usually around 1-3% of your mortgage value for a one point reduction in your interest rate. This can also occur in half or quarter points.

      For example, let’s say my mortgage is for $100,000 and I want to “buy down” (the lingo again) my interest rate of 6.5%. My lender says I can buy down 0.5% percentage points for 1.0% of my mortgage amount ($100,000 x 1.0% = $1000). I decide to go nuts and buy 1.5 points down, costing me $3000 but loweing my interest rate from 6.5% to 5.0%.

      Whether it’s cost effective to do this depends on how long you plan to keep the house and not refinance. The above example would not be a good idea if I was only planning to keep the house 5-6 years and then sell it. I would not recoup my $3000 in the 5 years I keep the house with the 1.5% interest rate savings. However, over 30 years I would save a lot of money.

  14. Germanovsky says:

    “So if you have two people each paying down a $5,000 credit card bill at $150/month, the person with 12.9% APR pays $1,235…” – First of all, its not $1,235 but $1,225 – and that amount will take 4 years to repay at $150. If you pay $447 per month you can knock that debt down in just 12 month and pay only $357 in interest – or you can get a balance transfer with zero apr for 12 month and than the cost of paying it off will be a mere $150.

    “… in interest while the person with 20.3% APR will pay almost double that — $2,421 — in interest.” … Well if that same person tries to pay-off his 20.3% APR debt in 12 month, the interest cost will be just $567, with a minimum needed payment of $464/month – $17 higher than in the first example.

  15. WB987 says:

    I stopped trying to actively improve my credit score. I’m in the 680-700 range with the only “debt” the bureaus see is the balance held on my credit cards when they take a monthly “snapshot,” which is before I’ve paid them off for the month. And I keep even those totals low compared to the total credit line. I’ve been told that I don’t have enough open credit and that I don’t utilize enough of it to improve my score. And, to that, I say “screw it.”

    • Such an Interesting Monster says:

      Yup, I’m with you. I stopped caring about my FICO score years ago and haven’t looked back.

    • who? says:

      Yep. Pay your bills. Have insurance. Live within your means. Check your credit report every once in awhile to make sure it’s accurate and there’s no fraud. Live life. Lather, rinse, repeat.

      Looking at your credit *report* to see if there are inaccuracies should be done on a regular basis, but the only time someone should even be looking at their credit *score* is when they’re about to buy or refinance a house, and they’re trying to fix problems. The rest of the time, if you’re paying your bills on time, the score doesn’t matter.

    • BennieHannah says:

      Me three. We own our home outright — paid if off in 13 years. Purchase used cars with cash we’ve saved. Have a rather large savings account and IRAs (which will be dramatically larger once we get our young adult children off the teat), and have no outstanding debt and haven’t for years really. So…when we went to take out a loan to purchase a secondary property with one of our children, low and behold, our credit score was on the low side. We had one negative mark because of a disputed health insurance claim, but other than that the lower score was due to the fact that we have ASSETS and aren’t overextending ourselves with loans we don’t need.

      Now I just don’t worry about it. In a scheme where assets aren’t figured in, I have a hard time believing a credit score reflects a borrower’s true net worth and ability to repay a loan. I’m not willing to play along.

      • Such an Interesting Monster says:

        Well that’s kinda the point. The system isn’t designed to be accurate or truthful in any way to help YOU. It’s a game designed to ensure the lenders are always the winners. The best way to win is not to play at all.

  16. CPENinja says:

    Hey fellow consumerists, here’s a question for your…

    So I’m getting married next week. I’m fortunate that I have a good job, no debt, and a great credit score. I still rent, and my fiancee is coming in with a good credit score and her student loans – nothing else outstanding. She can literally get any job she can find and will be able to cover her loans, and I can handle everything else.

    My coworkers always ask me why I don’t buy a house. Truthfully, the answer is that I do not have a lot of savings. I’m currently almost to my goal of ‘6 months base salary’ – and I do not want to simply blow all that on a house down payment.

    Or should I? I know the market has changed from what it used to be, and advice I find on the intertubes seems very random. Anyone have an experience like mine to share? Shall I keep on renting and saving, or take the plunge?

    As a second question – are townhomes worth it?

    • Such an Interesting Monster says:

      Take a year or two to save up as much of a deposit as possible (separate from your emergency fund) and then take the plunge. There is no good reason to rent if you can own.

    • Dirk Daring says:

      Just build up 20% for the down payment and use a manual underwriter. You don’t need a credit score to buy a house. Just look for the good deals, buy around Christmas too.

    • Wawa says:

      With a 20% down payment, you’re gonna need a lot more than that in savings.

      #1) Closing costs run 2% – 5% of the purchase price. You’ll have to pay and pre-pay for all kinds of stuff like property taxes and a year’s homeowners insurance. To get to closing, you will need to show your lender proof that you have money beyond the DP.

      #2) Immediately after closing, you’ll be buying all kinds of things for the house. As a first time homeowner, it will be substantial. It could be furniture, paint, lawn mower, window treatments, cleaning supplies, whatever… Unless it’s a new construction, there will probably be some thing(s) on the house itself that you will want to fix or replace right away. With me, it was $1500 for a new garage door and opener.

    • Johnny Baby for $$100,000,000,000,000 says:

      We decided to buy a house right before we got married, but that was back when the federal government was offering the $8,000 First-Time Homebuyer Credit. We figured up how much of a loan we could get with a monthly payment around what we were paying for rent at the time and only looked at houses that were asking that much or less. We only put 5% down. Since the FTHC stipulates that we have to live in the house for at least 3 years prior to selling it (which will be up in 2 months, actually), we figured that even if we eventually sold the house for $10,000 less than we paid for it, between the grant, the down payment, and the equity, we’d come out ahead of if we’d kept renting for these past 3 years.

      You’ll have to figure out how long you plan on keeping the house and if the equity you accrue will compensate for the costs of homeownership and the risk of selling for less than you paid.

      The FTHC, between the free $8,000 and the guaranteed 3 years of equity, moved us from it being a risky proposition to being a fairly safe bet. We did end up spending quite a bit more (money and time) on the process than we intended to (long story), and ended up closing 2 months behind schedule. The unexpected costs made us end up keeping a balance on the card we charged our wedding reception on, but only for a month, and I think the interest was around $12. The credit card has easily paid me more than $12 in points both before and after that, and that’s the only time I’ve ever carried a balance on it. Totally worth it to have the house, wedding, and honeymoon.

      Like I said, though, your results may vary.

    • aleck says:

      No!!!! Despite what the cable shows (and realtors) tell you, buying a house is NOT the next logical steps after getting married. Unless you happen to come across an incredibly great deal on a foreclosure. Building an emergency fund and 10-20% down payment, then you can think about it. Also, every time you buy a house, you spend 1% of the value in closing costs, every time you sell the house, you lose 6% of the value in realtor costs. So, you need to stay in your place enough to let it increase in value at least 7%. And house prices are not going anywhere any time soon.

  17. Dirk Daring says:

    You don’t want a credit score period. Want to finance a car? No. Buy a used one with cash. You don’t want a credit card – ever. You have a debit card, and when used as credit you get the exact same protections as a credit card (look it up). You can buy a new one once you’re a millionaire. Need to finance a house? Use manual underwriting. Then pay it off early. So that leaves… nothing.