| The true cost of a low credit score |
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| Likewise, if you want to take
out a home equity loan of $20,000, your credit score could cost you thousands
of dollars. According to MyFICO, a consumer with a score between 720 and 850 might
qualify for a rate of 7.911 percent and pay $190 a month and $14, 219 over the
course of the loan. For that same $20,000, a consumer with a credit score between
640 and 659 might qualify for a rate of 9.486 percent and pay $209 per month and
$17,562 over the course of the loan.
Auto loans can be just as costly
for people with lower credit scores. For a $20,000, 48-month auto
loan, MyFICO calculates that a consumer with a score between 720
and 850 might qualify for a 6.282 percent rate and pay $472 per
month. That same consumer would pay $2,670 in interest over the
four years of the loan. A consumer with a FICO score between 660
and 689 might qualify for an 8.844 percent rate and pay $496 per
month and $3,819 in interest over the course of the loan. That same
car cost the second borrower $1,149 -- $23.94 a month -- just because
of a lower credit score.
The
insurance factor
A low credit score can also cost you more when it comes
to your auto and home insurance.
Someone with a credit score of approximately 650 or
higher could receive a discount of anywhere from "a few percent
to 15 percent or even more" says Robert Hartwig, chief economist
for the Insurance Information
Institute.
Insurers
use credit scores as one of the factors in determining what's known as an insurance
score. "We're not looking to see whether you're worthy
for credit; we're trying to find the elements in the credit profile that correlate
with loss behavior for insurance," says Hartwig. Numerous
studies have found that people with lower credit ratings file more claims. There
are some theories as to why this is so. "Individuals who have credit problems
may well be more likely to defer important maintenance on their cars and their
homes," Hartwig suggests. "So those bald tires don't get replaced, the
brakes don't get fixed, the leaky roof doesn't get repaired and so on and so forth."
The impact of credit scores on insurance scores varies
from insurer to insurer and state to state. Some insurers only use
insurance scores for screening new customers, while others routinely
check the credit of existing policyholders when it's time to renew
their policies. But consumers can improve their chances of qualifying
for a lower premium rate by keeping their credit score in the mid-600s
or above, Hartwig says.
No one wants to throw away money. But by failing
to take steps to improve your credit score, you could be giving up thousands of
dollars a year. The best way to improve a blemished credit rating is to pay your
bills on time and keep debt to a minimum, says Paperno. "Everyone
should work hard to maintain a strong credit rating," says Hartwig. "If
you work hard, you build a good credit rating and if you maintain it over time
it has many, many benefits."
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