What Does My Bad Credit Cost Me?

People who have bad credit often have the misconception that bad credit is only expensive when they're trying to get a loan

. Nothing could be further from the truth. If you have bad credit and you're asking yourself "what is my bad credit costing me?" then the answer might surprise you.

Then again, there isn't one specific answer to that question because everybody is different, and there are so many factors that go into calculating somebody's credit score that two people might have bad credit but totally different circumstances one is eligible as a for loans while the other is not. There's also the fact that financial institutions are competing more than ever for customers so they might be more lenient towards some people as opposed to others.

Credit cards.

This probably is the area where most people feel the sting of bad credit. It also happens to be how most people end up with that bad credit in the first place. A lot of people get credit cards and they have no idea how they actually work. The cards get charged and they only pay the minimum. The balance gets higher and higher and it eventually reaches a point where the person can't even make the minimum payments. And that's where the trouble begins. Late payments, late payment fees, and something not many people know about and that's called universal default. Here's how it works: once you start paying late and having all sorts of problems keeping your account current, what the credit card company will do is increase your interest rate. But it doesn't end there, by virtue of the universal default principle, the interest rate on all your other credit cards is going to increase, not just the one that you're having trouble with. It is not uncommon to see interest rates in the 30% area although that has been somewhat curbed with the new financial regulation that has been put in place. In any case this is something to keep in mind.

Car loans.

Right up there with credit cards, car loans are another area where people paid dearly when they have bad credit. Do you see those offers for 0% financing or low APR financing in television commercials or in newspapers? Those are for people with good credit. Somebody with bad credit will most likely have to deal with a subprime lender and his or her interest rates will more likely be in the 20% to 25% area.

Mortgages.

So far, we have talked about credit cards and car loans because they are usually people's first means of access to credit. Consequently they are also the two products that people most often mismanage and get that credit because of that. At least in theory, people get mortgages later in their lives, at a point where they're more responsible about how they manage their finances. But if you are walking into a mortgage with bad credit then you should know that it's not only going to cost you now, you will be paying for that bad credit for 20 or 30 years. The reason is that this is the usual term for mortgage loans. If you get a 30 year loan then you're going to be paying higher interest rate for 30 years. It really adds up. I would love to give you numbers but interest rates fluctuate with time so it might not be relevant by the time you read this article but we are talking about a couple hundred dollars a month more because of bad credit. That's two to three thousand dollars per year, which amounts to $40-$60,000 over the term of the loan. That's a lot of money.

Other costs.

Employment opportunities. You can be overlooked for a position if your prospective employer makes it a policy to check applicants' credit reports.

Insurance. Most car insurance companies will charge you a higher premium if your credit is bad.

Utilities. If you have bad credit, utilities companies may charge you a higher deposit before they start service.

Renting. More and more landlords are checking prospective tenants' credit reports. If they don't like what they see that they will not rent you the apartment.

Bank accounts. If you have bad credit you may be unable to open a checking account at most major banks.

This is just a sample of how much back credit can cost you. If you want to avoid that, the best thing to do is to get copies of your credit reports from the three major credit bureaus. Review them, make sure that they have no mistakes, and if they do you should make sure that you take all the necessary steps to have those mistakes corrected. It may take a while but in the end you will save yourself tens of thousands of dollars.

by: Jeff Ebanks

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