4 Ways a Low Credit Score Can Cost You

You may be surprised to find out just how much more money you'll spend if your credit isn't great

Aug 16, 2014 at 12:44PM

Most of us know that with bad credit, you'll have a tough time obtaining a loan or credit card. But what if your credit is "good enough", but not great?

There are several ways having less-than-perfect credit can cost you money. For example, did you know that if you have a low credit score, it can double your insurance rates? Here are just a few of the ways a low credit score can cost you more money.

Higher loan rates
It's pretty well known that the higher your credit score is, the better interest rates you'll qualify for on mortgages and auto loans. However, the actual difference in cost can be tremendous.

Most lenders use the FICO score, which ranges from 300-850. Scores in the 600's and above will generally be able to qualify for loans, but interest rates and total costs can vary dramatically.

Home Flickr Mark Moz

flickr/ Mark Moz

Let's see how much this can affect you when getting a mortgage. According to myfico.com, the best rates go to borrowers with a FICO score of 760 or higher, and the current average APR for these borrowers is 3.77%. However, a borrower with a score of 630 can expect to pay 5.36% for the same loan, simply because they represent a greater risk in the eye of the borrower.

This difference in rates may not sound like much, but it results in a nearly $300 difference in monthly payments on a $300,000, 30 year mortgage. The borrower with lower credit will actually end up paying over $102,000 more to in interest over the loan term.

And the difference in interest rates can be even more dramatic when buying a car. You can qualify to buy a car with a credit score of 500 or even lower, but it'll cost you. Top tier (760+) borrowers can get an average interest rate of just 3.24% on a 60-month new car loan, but a borrower with a score of 630 can expect to pay 10.68%. And for those in the lowest tier (580 and below), the average interest rate is a staggering 17.1%.

Camaro Wiki Fluous

wikipedia/ Fluous

To see how a lower credit score affects other types of loans, check out myfico.com's loan calculator, which is updated daily with current rates.

You can get a credit card, but you'll miss out
If you have a decent, but not great, credit score, you'll be able to get a credit card. Having a credit card is extremely helpful when renting a car, or staying at a hotel, as most have restrictions on debit card usage.

However, you're not likely to find a competitive interest rate, low fees, or a good reward program. Credit cards for consumers with lower credit scores typically have interest rates of 30% or more, low credit limits, and high fees.

Credit Cards

For example, the First Premier Bank Credit Card has a sky-high 36% APR for purchases, and most cardholders get an initial credit limit of just $300, of which $75 is already used to pay the annual fee as soon as you get the card. There is also a $95 one-time "processing fee" and a $6.25 "monthly servicing fee" attached to the card.

In contrast, a credit card designed for consumers with good credit, like the Discover It card has a 0% intro APR and a permanent rate as low as 10.99%. There are also no annual or monthly fees, and the card gives customers at least 1% cash back on all purchases.

Insurance costs can skyrocket
A lot of people with low credit scores don't even realize it, but they are likely paying much more for insurance than they would with a higher score.


In fact, according to a new report by bankrate.com, consumers with poor credit pay an average of 91% more for homeowners insurance than those with excellent credit. Another report says auto insurance is 20-50% higher with bad credit, even with a stellar driving record.

With a low credit score, you'll have to come up with deposits for services that normally wouldn't require them, such as utilities and mobile phone services.

It isn't uncommon for a mobile service carrier to request several hundreds of dollars up front before opening an account for a customer with shaky credit. Deposits for utilities like electricity and water can also ruin in the hundreds. And, some landlords will require a higher security deposit before renting to someone with a low credit score.

Your plan of attack
Simply building your credit score to the point where you can borrow money isn't enough. To avoid thousands of dollars in extra expenses, it's very important to do whatever you can to get your score as high as possible.

The first thing to do is to understand how the FICO credit scoring system works, which is detailed on their website. Then, check where you stand and start taking measures to fix any issues. The money you save over the years will be well worth the effort.

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4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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