by John Ulzheimer, Credit Expert for CreditSesame.com
I've often been asked exactly how much a bad credit score will cost you over your lifetime. And while that question is hard to answer definitively for every person reading this, it is a fact that poor credit will make your life more expensive across a variety of services. Higher interest rates, larger deposits, more expensive premiums and the lack of access to quality financial services are all ways a poor credit score can cost you more. But, exactly how much more?
No two people have the same credit appetite so you can't simply say that poor credit will cost you $500,000 over your consumer credit life cycle. Someone who leans heavily on credit is clearly going to have a larger penalty than someone who chooses to pay cash for everything. However, if you were to compare apples to apples across similar loan products, it doesn't take long to see just how expensive bad credit can become.
If you have poor FICO or VantageScore credit scores, you're not going to get as low of an interest rate on a mortgage loan as someone with great credit scores would. That's simply a fact, and it can be an expensive one. Keep in mind, too, if your scores are too low, you could be denied outright.
According to Informa Research, the average interest rate on a 30-year fixed rate mortgage for a consumer with a FICO score of 760 or above is 3.8 percent. If you were to take out a $200,000 mortgage loan at 3.8 percent your monthly payment would be around $935. If, however, you had a FICO score of 650, the same mortgage loan would cost you 4.9 percent, which is still a pretty good interest rate historically speaking.
At 4.9 percent, however, your monthly payment on that same $200,000 mortgage would cost you about $1,060 each month. That's a difference of $125 each month. This doesn't sound like that big of a deal until you start annualizing the figures. Each year you'll pay $1,500 more in interest and if you live in the house for five years that means $7,500 more in interest.
If you live in an area where the cost of living is considerably more expensive -- Bay Area, New York, Chicago, Atlanta, Los Angeles -- then the numbers are much more impressive. Using the same score difference in the previous example, and a $500,000 mortgage you'll pay $3,670 more per year and over $18,000 more over five years.
These figures assume one house and one loan, but that's not necessarily reality. Most homeowners buy several houses over their lifetimes. I'm 45 and I've already purchased six (and sold five). Point being is that your added cost of home-ownership is compounded because you'll be paying more on several, consecutive or concurrent, mortgages over your lifetime.
The average rate on a general use credit card is somewhere around 15 percent, depending on the various sources. That is likely to be the most expensive debt you'll ever service, and 15 percent is just the average. The cost of a poor credit score relative to credit card debt is much more pronounced than any other financial service.
At 15 percent, someone carrying even a modest $5,000 in credit card debt and making the minimum payment will end up paying back over $12,000 and it will take over 27 years to do so. That's the best case scenario.
Someone who has poor credit is going to pay a considerably higher interest rate on their credit cards. It's not unheard of for someone to pay almost 30 percent interest on a subprime credit card. So, doing the same math on the same amount of debt in the previous example, the new numbers look like this ... (you may want to sit down):
At 30 percent someone carrying $5,000 in credit card debt and making the minimum payment will end up paying back over $132,000 (that's not a typo) and will take over 30 years to do so.
It doesn't end with mortgages and credit cards, although their divergence is clearly the most expensive and impressive. Auto loans, insurance premiums, and utility companies all use credit scoring as a basis for your rates, premiums and deposit requirements. There's simply no getting around it. Poor credit scores make life more expensive.
This post originally appeared on CreditSesame.com. John Ulzheimer is a nationally recognized expert on credit reporting, credit scoring and identity theft. He is twice Fair Credit Reporting Act certified by the credit industry's trade association and has been an expert witness in over 140 credit related cases to date. Since 2004 John has been interviewed and published over 3,000 times on the topics of personal finance and consumer credit. Formerly of Equifax and FICO, John is the only recognized credit expert who actually comes from the credit industry.