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Someone with a 580 to 669 credit score range, for example, will pay an extra $3,000 in interest on credit cards over multiple years compared to someone with a score of 740 to 799, which is considered “very good” credit score.
The person with just a fair credit score will pay $41,000 extra in interest over the life of a 30-year mortgage as well.
This $56,000 estimate is generously low. Based on the analysis I run, a bad credit score can cost an average household upwards of six figures!
Why the difference?
CBS News estimates assume an individual will only have one student loan, buy one car, own one home, and never live with a significant other (who likely also has debt – My Wife Spent $45,000 From Our Joint Checking Account Without Telling Me).
- Here is How Much Home, Car, and Debt You Can Afford on a 30, 50, and $100,000 Salary
- Why Millennials Face the Scariest Financial Future Since the Great Depression
Additionally, the dark shadow a bad credit report cast isn’t limited to hanging over the heads of only homeowners. An increasing number of companies and landlords request credit reports as part of their background check. In other words, bad credit impacts renters and homeowners.
How to Raise a Bad Credit Score
The intent of this post isn’t to scare you into canceling all your loans, withdrawing all your cash, and burying your money in a hole next to your home down by the river. That is not what a Behavioral Investor would do, or anyone with more common sense than common cents should do.
Watching yourself have less money is painful. You also feel ashamed, foolish, like you screwed up. One of the toughest things is to separate your money from your ego and identity. – I Became a Disciplined Investor Over 40 Years. Covid-19 Broke Me in 40 Days
So, what should I do? I’m glad you asked.
There are some simple Calls to Action you can immediately follow to raise a low credit score. Based on the type of loan you have you can refer to the tools I’ve linked below. The purpose today is to start making the most informed decision about your household’s debt.
Related: How to Recession Proof Your Finances
Calls to Action
The best way to raise your credit score is to pay down your debts.
- Our 4-step D.E.B.T. Free plan gives you the roadmap we used to pay off over $30,000.
- MG’s series of books, D.E.B.T. Free or Die Trying, are available on Amazon starting at just $1.99.
- Our 15 favorite money books are reviewed here.
If you already have good credit (740 or higher), then start playing the game in your favor. Learn more. Know better. Do better!
- For example, you can use today’s historically low-interest rates to ensure you’re paying the lowest rates possible on your outstanding debt. A low-interest rate combined with paying over the minimum payment each month is the best two-step accelerant you can apply to raise your credit score and reach debt freedom as quickly as possible.
If you’re looking for more free resources, then check out the following:
- Our list of 35 voices in personal finance
- The Best African American Podcast and Blogs
- Join our free weekly newsletter covering money and investment advice, read our hundreds of blog posts, or review our easily searchable podcasts all specifically tailored to help Millennials find ways to make money, save money, get out of debt, and increase their wealth…while having some fun along the way.
Now that we’ve covered some simple ways to raise your credit score, let’s review how your score impacts various loans you may currently have. Remember, all costs we’ll cover below increase as your credit score decreases. Unfortunately, the system is set up to make money the most expensive right when you need it most. For example, here are the average interest rates that may be offered to two different individuals based solely on their FICO Score.
To be frank, life gets more expensive as your credit worsens. For large purchases like a car or home a few percentage points mean you’ll pay thousands more to own the same asset.
1. What Makes Your Credit Score Go Down (or up)?
The average credit score in the U.S. is 675. Both hosts of Paychecks and Balances, LLC. were fortunate to reach an 800 FICO Credit Score, which we talked about here. We talk a lot about what we’ve learned along the way on the show and on national news. Here’s a quick summary of the key factors that impact your credit score.
Although there are five major items used to calculate your credit score, just two encompass almost 70-percent of your score—1) Positive Payment History and Total Credit Utilization (total debt/total available credit).
While the FICO 10 will change how credit scores are calculated going forward, scores generally range anywhere from 300 to 850+. Generally speaking, a “good” credit score is any score 740 or above. The specific number might vary from lender to lender or the type of loan you’re applying for.
However, studies show and experts agree that the benefits offered to FICO Score between 740 and 850 are far less dramatic than those with scores between 640 and 750. In other words, if you’re looking to raise your credit score, you don’t have reach perfection (850). A credit score of 740+ will put you well above average and allow you to receive most of the low rate offers you see advertised.
Below are four examples covering how your credit score impacts specific types of debt and the total costs you’ll pay as a result.
2. How Your Credit Score Impacts Your Credit Card Interest Rate
According to NerdWallet, the average household credit card debt is $7,100. TheBalance.com, which calculates average credit card rates on a monthly basis, found interest rates were hovering around 21% APR (March 2020).
If we use the free debt calculators available at Bankrate.com/Calculators, we find that the average household owes a minimum of $142 in credit card payments every month. If this household only makes the minimum payment they will pay on this debt for over 30 years for a total of $36,717. Of this total amount, $29,617 is interest costs!
3. How Your Credit Score Impacts Your School Loans
According to NerdWallet, the average household student loan debt is $46,679. Your credit score has a more significant impact on interest rates in the private student loan market. However, for our analysis today, we will assume a 20-year term and a 6% average interest rate.
With these assumptions, Bankrate’s Student Loan Calculator estimates these households pay $334/mo. If they started making student loan payments today, they would pay off their debt in March 2040. Combined, their student loans will cost $33,582 in interest. If they only make the minimum payment for the life of the loans, they will pay a total of $80,261.
4. How Your Credit Score Impacts Your Mortgage Rates
According to NerdWallet, the average household mortgage loan is $192,618. If we do a comparative analysis of the lowest mortgage rates offered today (3.62%) compared to the highest mortgage rates offered (4.50%), we find over the course of a 30-year mortgage the household with the worse credit score pays $35,000 more to own the same home.
Mortgage rates at the date of this post, which are at historic lows, were hovering around 3.75% to 3.88%. Generously, for our assumptions today we will assume the following:
- the low end of the rate (3.75%)
- a 20% down payment of $48,154 (20% x $240,772) on the home before taking out the loan
- a 30-year mortgage.
With a 3.75% fixed interest rate and 30-year mortgage term, this household will pay an estimated $1,427/mo.
If they decide to only make the minimum payment for the life of their 30-year mortgage, they will pay a total of $321,135 (Note: If the home appreciates in value at 2% a year (not guaranteed) it will be worth about $408,212 in 2050. For those interested, you can compare how much a similar amount invested in an index fund would grow with this free tool).
5. How Your Credit Score Impacts Your Car Loan
According to NerdWallet, the average household has auto loans totaling $27,934. In March 2020, auto loan rates averaged around 5% for a 60-month loan (Note: there are auto loan offers for as long as 84 months in some states! Do not sign those loans.).
According to Bankrate’s Auto Loan Calculator, the average household pays $527/mo. for their vehicles. If they only make the minimum payment for 60 months (5 years), they will pay $27,934 in principal and $3,695 in interest for a total of $31,629.
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