Financial Fundamentals Blog

Here's How Much a Low Credit Score Can Cost You



Your credit score is often cited as one of your most important financial assets. But while financial experts love to discuss the risk of a low credit score, many consumers aren’t aware of the material costs that come with negative marks on their credit report.


The costs of a low credit score can span many aspects of your financial and personal life. Chronically low credit can also have a cumulative effect, draining more of your financial resources and causing you to miss out on time-sensitive opportunities, such as buying a home at a low interest rate.


Here’s an overview of the possible costs of low credit and what you can do to reduce those costs over time.


The Lifetime Cost of Low Credit

Although the true cost of low credit will be unique to every individual and their financial goals and choices, one thing is clear: If low credit persists, the costs can be devastating.


One study estimated that the lifetime difference in interest paid between a very high credit score and a poor one could be $400,000 or higher. This massive figure can have direct implications on your standard of living, your ability to save and the age at which you’re able to retire.


Even if you can’t immediately shift from one end of the credit score spectrum to the other, modest improvements can go a long way toward improving your score and your financial opportunities over time.


Where Low Credit Will Hurt You the Most

In general, low credit will create the biggest cost on your largest loans and/or your longest-term loans. Even when you’re able to improve your credit score, the low rates you were forced to accept earlier in your life could continue to plague your finances for as long as it takes to repay that debt.


For auto loans alone, the difference in the lifetime cost of loan interest could be more than $70,000 for some consumers. For mortgages, the cost of interest can extend into the hundreds of thousands. While you might be able to refinance this loan later in life to escape high interest, the overall interest rates offered at that time may be higher than when you initially purchased your house, and you’ll have to pay associated refinancing costs to switch over to a different loan.


In some cases, low credit could restrict your access to a wide range of financial products or even an apartment.


Simple Steps To Lower the Cost of Bad Credit

If you have bad credit, you might assume that you can avoid the cost of a low credit score by avoiding using credit as much as possible.


Unfortunately, a no-credit approach can also hurt your finances. When used properly and with competitive interest rates, credit can help preserve your liquid cash and increase your purchasing power. 


Avoiding the use of credit also prevents you from taking steps to raise that credit score by demonstrating your financial responsibility. These steps include:


  • Paying your bills on time: Bill payment history is the single biggest factor in credit score calculations.
  • Keeping credit card balances low: Lower debt utilization will demonstrate your money management skills while also preserving available credit in case of an emergency.
  • Using a secured credit card to rebuild credit: If you’re unable to qualify for a regular credit card due to a low credit score, a secured credit card can help you build up a credit history through the use of prepaid credit.
  • Limiting credit accounts to what you can manage: Controlling your use of credit cards — and simplifying your money management — will help you maintain consistency in your credit habits.
  • Using a money management app to avoid overspending that can lead to credit overutilization: In some cases, credit scores suffer because consumers struggle to set and stick to budgets. The more awareness you have of your spending, the better positioned you will be to improve your credit and avoid the costs of a low score.

As you work to build and maintain better credit, it’s helpful to manage your finances through an institution offering a wide range of financial products and resources. Your local credit union offers in-house experts, free resources and low-interest loans and tools to help you reach your financial goals.


Become a member today by opening a checking account.


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