Credit Education: How Much Does Bad Credit Cost You?

September 23, 2011 | Author: | Posted in Credit Card | 683 views
Bad Credit Repair

Bad Credit Repair

As you make your way through your day to day purchasing, it is easy to adjust to how much your lifestyle costs you. By now, you’ve most likely gotten used to how much things cost, as well as the terms you typically have to agree to for most of the things you buy on a regular basis. In this next segment of your credit education, you will see a comparison in the cost of like items for people with good credit, and people with bad credit or no credit.

Expense Number One: Housing

This is likely the easiest example to point out the difference between good credit and bad credit.

With bad credit or no credit, you can often look forward to higher deposits and sometimes, higher monthly leases. As well, it’s nearly impossible to qualify for a home loan, so you’re stuck with paying rent that isn’t tax deductible. How bad does this hurt you in reality? In order to produce the money to pay your rent and the taxes on the money you paid the rent with, you have to earn anywhere from 20% to 40% more than your rent payments, since you don’t get to take advantage of the benefits of tax deduction. In order to pay rent of $1,000 a month, you have to collect anywhere from $1,200 to $1,400 a month depending on your tax bracket, and it could be even more.

On the other hand, those with good credit can often look forward to lower deposits, lease amounts, as well as much easier access to everything that comes along with owning a home like tax deductible mortgage payments. A $1,000 a month mortgage payment can very likely be almost completely tax deductible. What this means is that in order to cover the payment, you only have to earn about the same amount, since you get to write off the interest on your taxes.

Savings from this example: $200 – $400 a month in tax savings, as well as many other savings from lowered lease terms, deposits, etc

Expense Number Two: Loans

Whether it’s the loan on your house, your car, your education, or just your credit cards, having bad credit can have a ruinous effect on your ability to borrow as well as the interest rates you have to pay. If you can qualify in the first place, your payments will likely be much higher.

As of this writing, home loans for good credit borrowers are offering interest rates around 4.5%. Borrowers with bad credit can be as high as 10% or more. On a 30 year fixed loan of $150,000, a borrower at 4.5% will have a monthly payment of $760. A 10% interest rate on the same loan will hike up your payment to $1,316.

Similar differences will certainly be seen with auto loans, student loans, and credit cards, and many more. A borrower with bad credit can easily pay $150-$300 a month more for an average vehicle.

As of this writing, the average credit card debt per household is $8,329. A card with that balance carrying a 4% interest rate, typical for card holders with excellent credit, brings a payment of $111. Credit cards for people with bad credit can easily range around 23% which equates to a payment of $243.

Savings from this example: $556 a month for the home loan, $150 – $300 a month for an auto loan, and $132 a month for credit cards. That’s a total savings of $838 to $988 monthly.

Expense Number Three: Auto Insurance

There’s no way around it: If you want to drive legally, you have to have auto insurance. The trend with many companies is to charge higher premiums for insurance for drivers with bad credit than those with good credit. Insurance companies that don’t do credit checks usualy are much higher to start with. Drivers with bad credit can expect to pay upwards of 20% to 50% higher premiums than drivers with good credit, or effectively turning a $100 premium payment into a $120 to $150 payment.

Savings from this example: $20 – $50

Total Savings from all examples: $1,058 – $1,438.

Where this really starts to hurt is in the long run. Taking the $1,058 example and rounding down for the sake of simplicity to $1,000, you end up with $12,000 a year on lost savings. That’s $120,000 per decade, and $480,000 across the span of 40 years, the timeframe of someone between ages 20 and 60. Any financial analyst will quickly point out not properly investing that kind of money will, through the course of your life, cost you millions of dollars in losses, and could contribute to whether or not you retire.

The good news: It’s not hard to learn how your credit works and, if need be, how to repair it. It simply takes the (rather small) effort of investing in your credit education.

Behind the scene secrets from the the professionals that work with credit everyday are available at Credit Education: Guides and Workbooks. This feature has been compressed to fit the format of this website. For the entire, original article, containing extra supporting information and resources, please go to Credit Education: How Much Does Bad Credit Cost You?.

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