September 29th, 2008
Is The State of Your Credit Forcing You to Spend More Money?
Many of us don’t realize just how much of an impact our credit scores can have on our finances. What triggers change in your credit scores? Well, if you have had difficulty paying your bills in the past, or you have not done much work to build up your credit history, chances are your score may be too low. The standard with this method of risk computation rewards consumers with higher scores, and if you haven’t been working to get your score up, now is the perfect time to start.
The reason that your credit score may affect how much interest you pay on a loan, or how much you pay for certain services is due to the fact that banks and creditors use this score to compute how much of a risk you may be. Even if you don’t think you are a big risk, and you’ve worked hard to start paying your bills on time every month, if you had trouble in the past, chances are the effects are still there in your score.
Having a low score can cause you to spend more money in a variety of different ways. First and foremost, it will definitely impact the amount of interest that a bank will charge you for a loan, if you are able to get an approval. For example, if you live in New York, and have a 30 year fixed rate loan for $50,000, the difference in how much interest you may end up paying can vary by as much as more than $100,000.
Using this example, a person with perfect credit, or a score above 720 would pay around $55,000 of interest during the course of the loan. A person with a low score of less than 559, would end up paying more than $163,000 of interest during that same time period. This is incredibly significant and can have a major impact on your life. What would you rather spend more than $100,000 over the course of 30 years?
Interest rates are not the only thing affected by poor credit scores. Using the same formula above, a person with perfect credit would only have to pay $292 a month on this loan. A person with bad credit would have to pay $592 a month on that same exact loan. That’s an extra $300 a month that could be going to something else.
In addition to these factors, a low credit score can also force you to have to pay a larger deposit for utilities and services, and you may not be able to rent a home or apartment. Landlords are using credit scores on an increasing basis to determine how much risk their tenants pose.
You don’t have to accept a low credit score, but you do need to take steps to change it. We recommend monitoring your score every month and working to pay down your debts, get rid of collection accounts and try to get that score up as much as possible.
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