The Cost of Poor Credit
Millions of Americans have credit reports that reflect a less than ideal credit history. If you fall into this category, you’ll soon find that the cost of poor credit can penetrate deeply into your life. You may not be able to qualify for a small personal loan, secured credit card or computer loan. And it doesn’t end there. Lenders, employers, landlords, insurance companies, and other organizations often look at your credit report in order to evaluate your financial status.
Your credit worthiness is reflected by how well you manage debt and how often you make on-time payments. Every time you apply for credit to purchase high-value items such as a house or car, your credit history gets thoroughly reviewed. Most financial institutions consider your credit scores as a benchmark to determine credit worthiness. They take this figure seriously, and it is often the most significant factor in their decision-making process.
If you have a poor credit history or a low credit rating, a business may deny you the credit you request. Bad credit scores can take away your chances of getting approved for a mortgage, car loan, personal loan, or even a credit card. If you are able to get a loan, you may have to accept unfavorable terms and conditions. Some credit card companies might issue you a card, but only grant you a small spending limit.
When lenders take on customers with lower credit ratings, they often charge higher interest rates. This is done in order to compensate for the higher risk a borrower holds on account of failing to pay monthly installments, late payments, or defaulting entirely. Additionally, lower credit scores may result in a tight payment schedule.
The lending industry charges different rates, based on the health of your credit score. From credit cards to mortgage loans, people with poor credit end up paying much more over time than those with outstanding credit. Let’s consider a few examples of the cost of bad credit with respect to various products.
Mortgage Loans
A mortgage often involves a large amount of money, so even a 0.5 percent interest rate variation can become significant. You could end up paying around $5,000 more on a 15-year mortgage, for instance.
Auto Loans
The rate you’ll receive on a car loan can vary greatly, depending on your credit rating. Say two people apply for a loan of $18,000 to purchase identical cars from the same dealer, and plan to repay the loan in 3 years. The only difference is their credit rating: Person X has excellent credit, while Person Y has bad credit. Person Y will attract a higher interest rate. The monthly installment and total payout for Person X might be $532.07 and $19,154.52, respectively. However, Person Y’s monthly installment and total payout could come out to be $677.69 (145.62 more than Person X) and $24,396.84, respectively. So the person with bad credit will pay approximately $5,242 more for the very same car.
Even if your credit is not terribly low and you qualify for a loan of 13 percent, you would pay approximately $2,679 more for the same car purchase by Person X.
Credit Cards
When customers with excellent credit ratings apply online for a credit card, they are usually approved for the card within minutes. They might receive an attractive interest rate, such as 9 percent, and have no annual fee.
Those with poor credit, however, will face more difficulties in the process. It may be hard to get their application approved of, and even then a high interest rate might be attached. Receiving a rate between 19 and 24 percent is common. An annual fee ranging from $200 to $450 may also be included. The magnitude of the extra cost would depend on the monthly balance carried. Overall, however, the person with bad credit will often end up paying at least twice as much as the person with good credit.
The above examples are just a few of the many ways that bad credit can cost you. In reality, the cost difference between good and poor credit can be even greater. More so, the cost of repairing bad credit also tends to be expensive. Think about it: can you really afford to keep your eyes off of your credit score?
Stephanie Andrews
http://www.articlesbase.com/finance-articles/the-cost-of-poor-credit-707963.html
Comments
I have a poor credit score. What percentage of a home with a cost of $180,000 would I need to put down to buy?
I would like to purchase a home but have a poor credit rating, below 600, I would like to know if it is still possible for me to purchase a home if I had a large downpayment, but need to know approx. how much that would need to be.
Right now with the economy in this crisis, you probably can if you’re willing to put down a LARGE downpayment, like 30%.
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Depends on the mortgage company. Because of the current mortgage crisis, it’s a little harder than before. Thank the idiots who got in over their head for that.
What may end up happening (if you get approved) is that they’ll make you pay some sort of additional sum as a sort of penalty (as much as $5000 or more is not uncommon).
And you CAN get approval with a credit rating of 600 or below.
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100%
You’re not going to get financing with a 600 credit score right now.
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Standard down payments are 20%. However, I’d talk to your Realtor or financier to see what kind of rate you can get. Instead of asking how much down payment will you need, you really should look at your finances and say, how much CAN I put down, and how much can I afford for a monthly payment. You don’t want to dig yourself into a deeper hole credit-wise than you have now.
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It will be difficult in this market no matter how much you save up, but I would plan on saving at least 20% (so $36,000) plus some money for closing costs; so figure you will need $40,000. You might have better luck going to a small local bank or credit union since they would have been hit less by the current housing troubles. Good luck.
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that depends on how far below 600 you are. 580 and above maybe as little as 3% FHA 3.5% after 1/1/09 but just making a statement like that with out more info gets you no good answers.
I am a mortgage banker in TN & KY
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It MAY be different now but, it used to be a 40% Down payment and you don’t have to Qualify!
40% of that would be, $72,000.
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These days, you can expect 25% or more, depending on your income.
Any lender that requires less of someone with 600 should be very carefully scrutinized as there may be very devious pitfalls buried in the contract.
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Below 600? You probably won’t qualify through most lenders. I work for a lender and our minium FICO is 640 with a downpayment of 20%.
You want to put at least 20% ($36,000) down whether or not you have poor or excellent credit. This has always been the rule of thumb when you buy a house. It’s only been the last 5 years or so that people have been buying houses without a good down payment- and look where it’s got us- with a destroyed economy and house values plummeting.
If you only put $10K down and the value falls you’ll owe more than the home is worth. That is a situation you want to avoid at all costs. Also make sure you have at least 6-12 months of living expenses in savings on top of the down payment before you buy to protect yourself from troubles. .
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Mortgage underwriter, homeowner
You will need 3% or $5,400.00 down to qualify for FHA. It should be noted that you can get approved down to a 500 mid score in some cases on a manual underwrite.
Feel free to contact me if you need help.
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8 years mortgage banker/broker
depending on how low your credit scores are below 600 you may or may not be able to get a loan. Also it depends on why your credit scores are low. If you have a large downpayment you will be more likely to get approved because the bank will lower its risk in the deal. If you would like to see if you can get approved send me an email
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In today’s market you will not be able to get a loan, next question is how many other debts do you have in comparison to your income, in other words it is credit score and affordability. Would take a few years and clean up your credit, or save up 180K for the home
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