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Bad Credit Means Higher Interest Rates Which Cost You More Money

Written by: Kristy Welsh

Last Updated: March 21, 2017

Did you know that having bad credit will cost you thousands of dollars over the course of your lifetime because you are paying a higher interest rate? Think of all the money you spend on interest every month on your home loan, credit cards, and auto loans. A low credit score means you are paying a very high interest rate which translates into a lot of extra money spent each month.

In this tight economy, lenders are particular on who they lend money to and at what interest rate. If you have bad credit, they are going to hit you with a high interest rate whereas a person with excellent credit, is going to enjoy the benefits of a low interest rate. Which person would you rather be? Tough choice — huh?

Cost of Loans with Bad Credit

To illustrate our point, let's take two fictitious people, Bob and Nancy. Bob has a FICO credit score of 720, an excellent credit score, whereas Nancy's FICO score is 650, a fair to poor credit score. Now, let's look at a scenario where they are both buying a car for $20,000 on a 60-month loan.

  • Bob takes out a 4 percent interest loan and his payment is $368.33 per month.
  • Nancy takes out an 18 percent interest loan and her payment is $507.87 per month.
  • At the end of 60 months, Nancy will end up paying $8,672.40 more for the same car.

Now, let's look at another example where Bob and Nancy buy a house for $150,000.

  • Bob's interest rate is 4 percent making his monthly payment $716.00.
  • Nancy's interest rate is 10 percent which makes her monthly payment $1,316.00.
  • Nancy has to come up with $600 more a month for the same house.

Long Term Affects of Bad Credit

In our example above, you were able to see the short term affect bad credit can have a person. Nancy has to pay so much more for the exact same products but what does that mean in the long run? Well, if they make about the same salary, the person with bad credit has less "fun" money at the end of the month. Money that could be spent on going out to dinner, taking a vacation, or maybe just investing in a retirement account. When you have bad credit, more than just your wallet is affected. Bad credit affects your family, your well-being, and your overall quality of life.

People who have bad credit never seem to get ahead of the game because they are spending much more for the same things. That is why is it so important to work on increasing your credit score and cleaning up your credit. Removing negative items, consolidating loans, paying off debt, and paying your debts on time are all things each of us can work on each and every month. A little effort can go a long way.

Get out of Bad Credit Hell

Now that you see how much money bad credit can cost you, how do you get out of bad credit hell? It is really quite simple, but it will take some dedication on your part. Just think about all the money you are going to save for that vacation to the Bahamas and that should keep you pretty well motivated. Here are some basic tips:

  • Pull Your Credit Reports.  You need to see what is on all three of your credit reports before you tackle the problem. You can get your credit reports for free, once a year, from AnnualCreditReport.com. 
  • Take Note of All Negative Items.  Mark off all the negative items on your report and begin the task of disputing these. Our article on "Disputing Negatives with Original Creditor" will show you the way.
  • Pay Your Current Accounts On Time.  Start paying your open accounts on time and start paying them off. Consolidate them by taking out a low interest low and pay them off.
  • Open Some Different Lines of Credit.  Your credit score will benefit from varied types of accounts and make sure to pay these on time and keep low balances on them as well.

Once your credit score increases, you can then apply for loans with lower interest rates. Get rid of all those high interest loans and you will start to see some extra money in your pocket at the end of the month. Your vacation on the beach in the Bahamas is really not that far away!