The Cost of Poor Credit
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By :
Stephanie Andrews
Submitted
2009-01-04 02:15:52 |
Millions of Americans have credit reports that reflect a less than ideal credit history. If you fall into this category, you ll soon find that the cost of poor credit can penetrate deeply into your life. You may not be able to qualify for a small personal loan, secured credit card or computer loan. And it doesn t end there. Lenders, employers, landlords, insurance companies, and other organizations often look at your credit report in order to evaluate your financial status.
Your credit worthiness is reflected by how well you manage debt and how often you make on time payments. Every time you apply for credit to purchase high value items such as a house or car, your credit history gets thoroughly reviewed. Most financial institutions consider your credit scores as a benchmark to determine credit worthiness. They take this figure seriously, and it is often the most significant factor in their decision making process.
If you have a poor credit history or a low credit rating, a business may deny you the credit you request. Bad credit scores can take away your chances of getting approved for a mortgage, car loan, personal loan, or even a credit card. If you are able to get a loan, you may have to accept unfavorable terms and conditions. Some credit card companies might issue you a card, but only grant you a small spending limit.
When lenders take on customers with lower credit ratings, they often charge higher interest rates. This is done in order to compensate for the higher risk a borrower holds on account of failing to pay monthly installments, late payments, or defaulting entirely. Additionally, lower credit scores may result in a tight payment schedule.
The lending industry charges different rates, based on the health of your credit score. From credit cards to mortgage loans, people with poor credit end up paying much more over time than those with outstanding credit. Let s consider a few examples of the cost of bad credit with respect to various products.
Mortgage Loans
A mortgage often involves a large amount of money, so even a 0.5 percent interest rate variation can become significant. You could end up paying around $5,000 more on a 15 year mortgage, for instance.
Auto Loans
The rate you ll receive on a car loan can vary greatly, depending on your credit rating. Say two people apply for a loan of $18,000 to purchase identical cars from the same dealer, and plan to repay the loan in 3 years. The only difference is their credit rating: Person X has excellent credit, while Person Y has bad credit. Person Y will attract a higher interest rate. The monthly installment and total payout for Person X might be $532.07 and $19,154.52, respectively. However, Person Y s monthly installment and total payout could come out to be $677.69 (145.62 more than Person X) and $24,396.84, respectively. So the person with bad credit will pay approximately $5,242 more for the very same car.
Even if your credit is not terribly low and you qualify for a loan of 13 percent, you would pay approximately $2,679 more for the same car purchase by Person X.
Credit Cards
When customers with excellent credit ratings apply online for a credit card, they are usually approved for the card within minutes. They might receive an attractive interest rate, such as 9 percent, and have no annual fee.
Those with poor credit, however, will face more difficulties in the process. It may be hard to get their application approved of, and even then a high interest rate might be attached. Receiving a rate between 19 and 24 percent is common. An annual fee ranging from $200 to $450 may also be included. The magnitude of the extra cost would depend on the monthly balance carried. Overall, however, the person with bad credit will often end up paying at least twice as much as the person with good credit.
The above examples are just a few of the many ways that bad credit can cost you. In reality, the cost difference between good and poor credit can be even greater. More so, the cost of repairing bad credit also tends to be expensive. Think about it: can you really afford to keep your eyes off of your credit score?
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Author Resource:-
Stephanie Andrews is a contributing editor of the website http://www.CreditCardCity.com - a credit card directory where you can apply for a new credit card with secure online applications. Visit now to compare all of the best online credit card offers.
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