Paying More in Living Expenses With Bad Credit
Written by: Kristy Welsh
Last Updated: March 24, 2017
Thinking about buying a house or a car in the near future? If so, you will need to review your credit reports to see just how bad (or good) your credit really is. The average American credit score is currently hovering in the mid to low 600's, which means you could have bad credit. Now, you could just let it go and not do anything more about buying a car or house, but soon you will be in for a rude awakening. Crucial living expenses are going to cost you a whole lot more with bad credit.
Repairing your credit is a relatively simple process. By making your payments on time and paying off your credit card and other debts, your credit score will improve. But if you don't work at increasing your credit score and fixing your credit, some basic living expenses are going to cost you much more compared to a person with good to excellent credit. Keep reading to find out how.
Lenders rely on your three-digit score to determine how likely you are to pay your bills on time. A low credit score tells them you are a risky borrower, one who is likely to pay their bills late or maybe not at all. A FICO score of 740 or higher means you have excellent credit and a score of 640 or lower is poor credit. What will this mean when you get a house? As quoted from Tim Lucas, editor of MyMortgageInsider.com,
And borrowers with an even lower score will be charged even higher interest rates that will cost them even more money each month. On the surface, a slightly higher interest rate might not seem that big of a deal until you figure how much more you will pay at the end of the year.
Maybe you are not in the market to buy a house and you think having good credit does not apply to you. Guess again. Landlords check your credit before approving your application for an apartment. If your score is too low, a landlord or rental management agency will view you as someone who may miss monthly rental payments. Because of this, you might be charged a higher monthly rent or you may have to come up with a larger upfront security deposit before you move in.
So even if you don't plan to ever buy a house, renting an apartment may be difficult and more costly with bad credit. You might have to have a parent or another person co-sign on a lease for you in order to build up your credit score.
Automobile insurance is an expense you can not live without if you plan on owning and driving a car. It might surprise you to know many insurers charge consumers with low credit scores higher rates for auto insurance. Insurers say that drivers with good to excellent credit tend to get into fewer accidents and thus file fewer claims. That is why drivers with bad credit are charged more for auto insurance. If you live in Hawaii, California or Massachusetts, these states are not allowed to use credit scoring when setting policy rates for auto insurance.
This same argument is being used for home owners insurance. Again, insurers says those with good to excellent credit file fewer claims compared to homeowners with low credit scores.
Unless you have enough money in the bank to pay for you next car with cash, you will be taking out an automobile loan on that new convertible. Even though auto loans may be smaller than mortgage loans, a higher interest rate will still add up to larger monthly payment and more interest paid over the term of the loan. The difference between an interest rate of 3.5 percent on a $15,000 five-year car loan and one of 5 percent on the same loan can really add up.
But what about all those low interest rates you see advertised on T.V.? Those rates are for people with the best credit scores - the better the credit score the better you look to lenders. So unless you have good to excellent credit, you are going to be paying more for the same car because the interest rate on your loan will be much higher.
On this site, we have dozens of articles about credit cards and most of us know credit cards already come with high interest rates. The credit card market changed drastically after the economic melt-down in 2008. Gone are the single digit interest rates. Today, even people with good to excellent credit can expect to be above 10 percent interest on a credit card. So imagine the interest rates for consumers with bad credit! Even a few points difference in the interest rate on credit card debt can have a a significant impact on your budget.
Say you have credit card debt of $5,000 at 18 percent interest. If you only make the minimum required payment each month to pay off that debt, you'll pay more than $3,000 extra in interest than if you only made the minimum payment each month and your interest rate was 13 percent. That is a much bigger burden, which is why high-interest credit card debt can be so difficult to manage and pay off.
When you have bad credit, the every day living expenses you take for granted will cost you more. More and more lenders, landlords, and insurers are looking at a person's credit score to determine if they will be a good customer for them. A credit score is much more than just three numbers, it is being used as a direct reflection of you as a consumer and what type of customer you will be in the future. Businesses have become very careful about who they lend money to and who they let rent their apartments. So put your best foot forward by having a good credit score. Increase your credit score by repairing your credit and you will lower the cost of your crucial living expenses.
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