And why you want to do everything to improve your credit score
What is a Low Credit Score?
First, a quick refresher on FICO—your credit score. Everyone is assigned a score depending upon how they handle their credit. Credit scores fall between 850 to 300. Excellent is between 800 and 850. With this score, the world is your oyster.
A good credit score falls between 670-739. Most consumers fall in this bracket.
Below 670 is considered a low credit score, defined as fair or very poor. From 579 to 300, you have very limited options for financing or obtaining any kind of credit.
Your credit score is based on your financial performance with the credit you have been given. Do you pay your bills on time? Are you current with your loans? How much credit are you carrying? We give more details about what exactly goes into your credit score in this article. The thing to remember is that your credit report follows you everywhere you go.
A low credit score will cost you in money and lost opportunities. Here is a look at 6 ways that a low credit score costs you money.
1. Higher Interest Rates
Many financial institutions offer lower interest rates depending upon your credit score. This is similar to car insurance companies who offer lower rates if you have a good driving history.
Lenders call it risk-based pricing.
If your credit score is low, you will not be eligible for the lower interest rates. This leaves you stuck with high interest rates and fees if you get the loan at all. Higher interest rates mean your original loan can easily balloon to double what you borrowed. And, it will take you that much longer to pay off the loan.
2. Auto Financing
Those higher interest rates hurt your auto financing too. With a good credit score, you can walk into your favorite auto dealership and find the car of your dreams. You don’t have the cash, so you finance the car. Great, your good credit score gets you something around a 3% interest rate on a $30,000 car loan. Not bad.
But if your credit score is not good, a $30,000 car loan is going to come with a 10% interest rate. You can do the math. That $30,000 auto loan is going to cost you much more and take much longer to pay off.
A low credit score is going to cost you more when you buy a home too.
Let’s take an example again.
According to a Zillow analysis, if you have excellent credit, you can qualify for a mortgage at 4.5% APR. If you have fair credit, between 640 to 680, that mortgage is going to come with 5.1% APR. Assuming an average market price of $213,000, that same home is going to cost you an additional $21,000 over the 30-year life of the loan. The buyer who has excellent credit is going to walk away with a much better financing package and have money for vacations. In places where the housing market is more competitive, and prices are more like $1M or more, your low credit score is going to cost you more than $100,000.
4. Credit Card Rewards
A low credit score will make you ineligible for better credit cards. The best credit cards offer tons of rewards like air miles, discounts and cashback. You can select the credit cards with the rewards that are the most valuable to you.
If you use your credit card wisely, these rewards can save you a lot of money. But, with a low credit score, you will not be eligible for these kinds of credit cards. You will be stuck paying full price for everything.
5. Rental Lease
Yes, a low credit score can cause you to be denied a rental lease. Why do landlords look at your credit score? They want to see how you handle your finances. A low credit score could be an indication that you are not careful with your money. You might be considered a risk…perhaps you will be late with the rent.
A low credit score could limit your home rental options.
A low credit score can cost you a good salary. Employers are also looking at your credit score. For them, a low credit score might be a sign that you are irresponsible, not level-headed or impulsive. These could be reasons to deny you the job.
Improve Your Credit Score and Save Money
No one wants to throw money down the drain. But this is what you are doing if you continue to maintain a low credit score. Now is a good time to implement a credit score improvement plan. The way to the finish line is really quite simple.
- Pay your bills on time.
- Watch your credit limits and stay well below them.
- Apply for a debt consolidation loan if you are struggling.
- Watch your credit utilization rate.
Here are some more ideas.