The True Cost of Bad Credit
I am often asked the question; What does bad credit cost me?”
It is a hard question to answer because of the individual’s circumstances and the fact that lenders are competing fiercely for customers.
But I will give it my best shot.
If you know your credit score you will be in a position to make a pretty good guess at what interest you will be charged on a mortgage. In today’s (March 2006) market, mortgage rates for those in the top or prime category, with a score above 720, will pay around 6.25%.
As your score declines your rates will increase.
For those in the second tier, with a score between 700 and 720, rates will go up to around 6.38%; for those in the third tier, with a score between 675 and 699, rates will be about 6.91%; for those in the fourth tier, with a score of 620-674, rates will be about 8%; in the fifth tier, with scores in the area of 560 to 619, the rates increase to 9%; finally for those with the lowest scores, 500 to 559, the rate jumps to 9.82%.
On a $150,000 mortgage, your payments will be between $926 and $1411, a $485 difference per month.
Additionally, those in the lowest tiers will face higher loan origination fees.
Most bankrupts will be in the 650 area – if they behave themselves – within two years of bankruptcy. You will save a lot of money if you push your score above 675 before trying for a mortgage.
These numbers are not written in stone and vary from lender to lender. According to some news accounts, you can qualify for the lowest rates with a score of 620, but proof of that is hard to find.
You will not qualify for zero or low APR financing offered by manufacturers. You will have to deal with a sub prime lender and will be charged rates in the 21 to 24% area.
Again, loan origination fees may be high.
Interest rates will be high up in the 30% area. If that was not bad enough, bad credit risks face fees that can choke an elephant.
Fees commonly charged to those with poor credit include the following:
Setup fee – while you can find some lenders that may not charge a setup fee, fees between $29 and $49 are not uncommon.
One time fees – these can be as much as $100
Account maintenance fees – $6 or $7 a month
Annual fees – $35 to $150
Bad credit credit card fees can easily run over $250 the first year, a little bit less after that, if you are not careful.
Other Hidden Costs
Bad credit can ruin your chances of getting a new job if you employer checks your credit report, which many do.
Some auto insurance companies will charge you higher premiums if you have bad credit.
Your utility deposit may be higher than for those with good credit.
You may not be able to rent an apartment, if the landlord doesn’t like your credit.
Even though just about anybody can find credit, no matter how bad their credit score, that doesn’t mean it will be inexpensive, or even affordable. It pays to shop around and read the terms of any offer of credit very carefully.
Rebuild your credit. Pay all your bills promptly and without fail. Only use a portion of your available credit, 20 to 25%. Avoid applying for new credit.
Within two years or so, if all goes well, you may qualify for better credit terms.