If you have bad credit, you have probably already noticed how difficult it makes it to acquire a loan from your average lender. Many lenders do not want anything to do with you unless your credit score reaches a certain level, and even then, you could end up paying high loan interest rates. The truth of the matter is that having bad credit can cost you hundreds of thousands of dollars in additional interest payments over the course of your life, which makes the effort it takes to improve your credit rating well worth it.
In today’s society, credit is a necessity. Even if you do not use credit cards, you will likely need credit to purchase a home or car at some point. When you have a poor credit score, however, lenders often see you as an escalated risk. This risk factor inevitably leads to them increasing the interest rate that they will charge you as you repay your loan. In the end, this can add hundreds of dollars onto your monthly payments, which makes it even more difficult to escape your debt.
If you purchase a home for $150,000, you will end up paying much more than that amount over the course of your mortgage. If you secure a mortgage with a 3.8 percent interest rate, which is generally reserved for those with good credit, your $150,000 mortgage will end up costing you about $330,000 on a 30-year term. This brings your mortgage payments to about $900 per month.
If you have a poor credit rating, however, your interest rate could approach 5 percent, which could make your mortgage end up costing you close to $575,000 over a 30-year term and about $1,600 per month. In other words, this increased interest rate will cause you to have to pay almost $250,000 extra when all is said and done.
On a larger mortgage of about $300,000, those with a good credit score would end up paying $665,000 over a 30-year term, with payments of $1,847 per month. Those with a poor credit rating, however, could end up paying over $1 million for this home. When you look at the big picture, you could end up purchasing a house that is twice as expensive for nearly the same amount of long-term cash if you increase your credit rating by as little as 100 points. As you can see, it pays off greatly to improve your credit before making a major purchase.
Improving Your Score
The credit score that you carry is what lenders use to determine their risk when giving you a loan. If you are viewed as a riskier option, they will want reward for taking on this risk. Your credit rating is actually more heavily weighted than your current debt and your income, since these factors usually have an influence on your current credit score. If you are desperate to make a major purchase in the near future, it will surely pay off to wait until you can secure lower interest rates. That way, you do not have to pay for your past mistakes well into the future.