6 Crucial Expenses That Will Cost More Because of A Low Credit Score

From a mortgage loan to an apartment, you could expect to more for certain expenses due to a poor credit score.
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Written by Dan Rafter
Financial Expert
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Managing Editor
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You need a personal loan. Maybe you’re ready to take out a mortgage loan to buy a home. Or maybe you’d rather rent an apartment in the heart of the big city.

If your credit score is low, all of this will cost you more, a lot more.

That’s because lenders and financial services providers rely on your three-digit credit scores to determine how likely you are to pay your bills on time. If you have a low credit score, lenders consider you a risky borrower, one who is likely to pay bills late or skip them entirely.

Why Credit Scores Matter

Generally, lenders consider a FICO credit score of 740 excellent. If your FICO score is lower than 640, though, you can expect to pay more for credit cards, loans, and other financial services, if you can even qualify for them at all.

“Because of a poor credit score, you may only have access to credit cards with higher interest rates,” says John Heath, directing attorney of Salt Lake City-based Lexington Law Firm.

Heath also warned that poor credit may not only cause you to pay more for necessary expenses but also result in being denied insurance.

“If you have poor credit, you could be denied insurance, or your premiums may increase,” Heath says.

Here are six services and products that you can expect to pay more for because of your low credit score

1. Personal Loans

Having poor credit indicates a higher risk for lenders, as it suggests a history of late payments or defaults.

To compensate for this increased risk, lenders charge higher interest rates on personal loans for individuals with bad credit.

This means you’ll end up paying more in interest over the loan’s duration compared to someone with good credit. Lenders use interest rates to mitigate potential losses from borrowers who might not repay the loan.

Maintaining good credit helps secure lower interest rates and reduces the overall cost of borrowing.

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2. Mortgage Loans

It’s not easy to qualify for a mortgage loan if you have a low credit score. But if you do qualify, expect to be charged higher interest rates. That can cost you tens of thousands of dollars.

Tim Lucas, editor of MyMortgageInsider.com, puts it like this: Borrowers with a FICO credit score of 740 today could qualify for a 30-year fixed-rate mortgage loan with an interest rate of 4 percent.

A borrower with a FICO score of 640 would be charged an interest rate of 4.375 percent for the same loan. On a 30-year loan of $250,000, the borrower with lower credit would pay $55 more every month. That comes out to almost $20,000 if that borrower pays off the mortgage in full over 30 years.

And for borrowers with even lower credit scores? They’d be charged even higher interest rates that will cost them even more money as they pay back their mortgage loans.

“The lifetime cost of having a bad credit score is staggering when it comes to a mortgage,” Lucas says.

3. Credit Cards

Credit cards already come with high interest rates. But if your credit score is low, you can expect to pay even higher rates. Gary Herman, president of ConsolidatedCredit.org, says that even a few points difference in the interest rate on credit card debt can have a significant impact on your budget.

Say you have a credit card debt of $5,000 at 18 percent interest. If you only make the minimum required payment each month to pay off that debt, you’ll pay more than $3,000 extra in interest than if you only made the minimum payment each month and your interest rate was 13 percent.

“That’s a much larger burden, which is why high-interest credit card debt can be so difficult to manage and pay off,” Herman says.

4. Auto Loans

Auto loans are smaller than mortgage loans, of course. But they can still add up to large monthly payments, especially if your credit scores are low. Auto lenders, like all lenders, charge higher interest rates to borrowers with low scores. The difference between an interest rate of 3.5 percent on a $15,000 five-year car loan and one of 5 percent on the same loan can add up.

“The cars for the new model year are coming out now, and auto manufacturers are advertising low interest rates,” says Ken Chaplin, senior vice president of the consumer division with national credit bureau TransUnion. “But those rates are only for those people with the best credit scores. The better the score, the better you look to lenders, the more likely it is that you’ll be able to enjoy those low advertised rates.”

5. Insurance

It might surprise you, but many insurers charge consumers with low credit scores higher rates for auto insurance. Insurers say that drivers with high credit scores tend to get into fewer accidents and file fewer claims. That’s why those with low credit scores are charged more. It’s important to note, though, that insurers in Hawaii, California, and Massachusetts are not allowed to use credit scoring when setting policy rates for auto insurance.

You might also pay more for homeowners insurance if your credit is score. Again, insurers say that homeowners with low credit scores are more likely to file claims, making them riskier customers.

6. Your Apartment

Landlords will check your credit, too, before approving your application for an apartment unit. If your score is too low, landlords will view you as a risk of missing your monthly rental payments. Because of this, landlords might either charge you a higher monthly rent or make you come up with a larger security deposit.

The Bottom Line

There is some good news, though: Repairing your credit score is a relatively simple process. These steps include making all of your payments on time and paying off your credit card and other debts. If you do this, your credit score will slowly improve.

Just don’t expect an immediate response. It can take several months or a year or longer of on-time payments and debt reduction to make a noticeable improvement in your score.

About Author
Dan Rafter
Dan Rafter, a valued contributor at MoneyRates, brings many years of expertise in the financial sector. Specializing in areas like credit scores, lending, mortgages, and credit cards, Dan has an innate ability to simplify complex financial concepts for his readers. His insightful articles have appeared in numerous print and digital publications, making him a trusted voice in the financial community. Residing in the Chicago area, Dan continues to offer knowledge and guidance for those navigating the world of finance.
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