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Having a bad credit score will cost you a lot more than a higher interest
rate for a few loans. It extends into many parts of your financial life.
So many people fail to understand how important their credit is until they try
to buy a home or take out a loan. People with bad credit usually know that they
will have to pay higher interest rates. But they often don't realize how deeply
they will really be affected.
Let me give you an example. If you have a credit score of 720, you can pretty
much expect to get the best rate available. For our example, that is 6%. If you
have a credit score that is good, but just not perfect -- say 700 -- you could
expect to find an interest rate of 6.15%. Not a huge difference. But if you have
a credit score of 555, which is considered very poor, you can expect to pay
approximately 9.6%. This could result in as much as $500 a month more on a
mortgage. That's a lot of money.
In addition to having to pay a higher interest rate, many borrowers with bad
credit scores end up paying higher mortgage loan origination fees.
To qualify for the much advertised zero percent of low APR financings offered by
many car manufacturers, you must have near perfect credit. If you have poor
credit, you will probably have to deal with a sub-prime lender (also known as
the no loan is turned down lender). You could pay an interest rate of 25%!
If you already have a bad credit score, a credit card probably isn't a good
idea. But it is one of the ways to rebuild your credit. Be prepared to see
interest as high 30%, if you can find a credit card at all. You will probably
have to pay annual fees as well. Some people are even asked to pay a set-up fee
to even get the card. It is often easier to go with a secured card than try to
find an unsecured one.
Most people are unaware of the fact that insurance companies use their credit
scores to determine risk. The assumption is that people with lower credit scores
are at a higher risk for claims than are those with good credit. A person with
good credit could pay as much as 10% less than someone with bad credit. This is
seen in life insurance, homeowner's insurance, auto insurance and other forms of
insurance. Your bad credit can cost you hundreds of dollars a year in insurance
premiums.
But that isn't all. You could have to pay a higher deposit to lease or rent an
apartment. You could even be turned down for a job. Low credit scores will cost
you thousands of extra dollars a year. Take the steps to increase your score.
While it isn't easy and it takes time, it is well worth it.
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