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How much do you know about credit? Like, do you know what a credit score is, in general? Do you know what your credit score is, specifically? How about what your credit “should be”? Do you know what makes it better and what makes it worse?
And why does it matter?
In this post, we’ll run through those first few questions to give you a basic overview of credit scores. Then we’ll talk about why it matters: because a bad credit score could cost you a fortune! Let’s discuss the crazy high cost of bad credit, shall we?
What is a Credit Score?
Your credit score is like a grade that tells the world how good (or bad) you are at managing money. Before anyone rents you an apartment, gives you a loan, or even gives you a job in some industries, they’re going to check your credit score.
Your credit score takes into account things like:
- how often you pay your bills on time
- how much money you currently owe compared to how much you’ve been approved to borrow
- any times you’ve failed to pay a bill or repay a debt
- and how long your credit accounts have been active
Having bad credit can keep you from renting an apartment, which is just embarrassing. It can also prevent you from buying a house one day.
And, who knows, you might want to start your own business one day and need a business loan. You can’t get one with bad credit.
How Do I Find My Credit Score?
It’s super easy to get your credit score online in minutes for free.
Just head to www.freecreditscore.com and follow the instructions. Easy!
What Should My Credit Score Be?
Ideally, you want a credit score over 750 (out of 850). That is considered excellent credit and will get you the lowest interest rates, which will save you the most money (more on that in a bit).
690-750 is considered good. 630-689 is just ok. Anything less is going to cost you HUGE.
What Makes My Credit Score Better or Worse?
Generally speaking, here are the factors that make your credit score better or worse:
- Payment History: paying on time consistently will improve your credit score, missing and late payments will lower your credit score.
- Amounts Owed: Keeping your borrowed amounts below 20% of your total credit limit will improve your credit score. Using more of the credit available to you will lower your credit score.
- Length of Credit History: the longer your accounts are open, the better.
- Credit Mix: Student loans and mortgages are treated more favorably than credit card debt.
- New Credit: New credit is an unknown, which isn’t great. The less new credit you have, the better. But you also need new credit to build your credit from nothing. So don’t shy away from new credit. Just use it responsibly.
The Crazy High Cost of Bad Credit
So how much is a bad credit score costing you?
Let’s say you’re buying a $20,000 car and need a 4-year auto loan. According to myFICO.com, if you have bad credit, you can probably get a 16.309% interest rate. Your monthly payments would be $570, and you’ll end up paying $7,359 in interest.
Compare that to car buyers with a great credit score (over 750). They can get a 4.6% interest rate. This would make their monthly payments just $457, and they’d end up paying just $1,935 in interest.
Holy S! Bad credit just cost you an extra $113/month and $5,424 in interest. Think of the more important things you could have done with that money!
And what if you decide to buy a house? Say you decide on a $250,000 house with a standard 30-year fixed-interest-rate mortgage. Scenario 1: You have meh credit (side note: you want at least meh credit to even get a home loan!). Your interest rate would be around 5.565%, your monthly mortgage payment would be $1,430, and you’d end up paying $264,687 in interest. Yikes!
Scenario 2: You have great credit (over 750). Your interest rate would be around 3.976%, your monthly mortgage payment would be just $1,190, and you’d end up paying only $178,429 in interest. Bad credit just cost you $240/month and $86,258 in interest.
So, on just one car and one house, you’re throwing away $91,682 just by having bad credit!!! That’s insane.
And most of us don’t just buy one house and one car. You could easily buy 10 cars in your life. And let’s say only 2 houses. Using current pricing (and you know that’s not right because cars and homes will just get more expensive), you’re blowing a lifetime total of $226,756!
If that doesn’t motivate you to build (and keep!) good credit, nothing will.
If you need a little help building or fixing your credit, check out these posts:
How to Build Perfect Credit from Scratch
5 Proven Ways to Improve Bad Credit
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