The no-so-hidden lifetime cost of a bad credit score
Consumers who don’t know their credit score or don’t think a credit score is important are robbing themselves. A credit score factors into everything from getting a job to getting a good deal on a house or a car. The simple process of checking a credit report can lead to action that results in thousands of dollars in savings over time.
A bad credit score costs money
Just about everyone a person does business with, from landlords to mortgage brokers to wireless carriers, uses credit report information to decide how much credit will be extended and how low, or how high, the interest rate will be. The difference between a good credit score and a bad one can add up to $5,000 in interest payments on a $20,000 auto loan. Maxing out credit cards or not paying bills on time could add 25 percent to the cost of that vehicle. The time and effort it takes to optimize a credit score can save an individual hundreds of thousands of dollars over a lifetime.
Correct credit report errors
For most responsible people, ensuring accuracy is the key to a good credit score and credit reports should be checked frequently. Credit scores are available online through FICO and the three credit-reporting agencies: Experian, Equifax and TransUnion. The government site annualcreditreport.com offers one free credit report per year, but it does not include the credit score. The different credit reporting agencies interpret information in different ways, so the best approach is to check all three resources. Information on credit reports can often be erroneous. Federal law requires that credit reporting agencies must correct inaccuracies free of charge. However, the agencies are known for making the process of correcting credit report errors difficult. Sometimes the money spent hiring a law firm that specializes in correcting erroneous credit report information is worth the time saved.
A good credit score saves money
One of the best examples of how a bad credit score costs money is current mortgage interest rates. Mortgage interest rates are lower than they have been for decades, but not for everybody. Borrowers with weak credit scores will pay several percentage points more on a fixed rate loan. According to FICO, a borrower with an excellent credit score might get a 5.9 percent interest rate on a $200,000 30-year fixed rate mortgage and pay $259,074 in interest over the life of the loan. A borrower with a bad credit score, if he or she can get a loan, may qualify for an 8.5 percent interest rate and end up paying $355,200 in interest. The bad credit score will have cost more than $127,000.