Ah the credit score. That fickle number that maxes out at 850 and magically tells lenders how much of a risk I am supposed to be. Is bad credit really that big of a deal? So what if I had to put a security deposit down with my electric company while others didn’t.
Bad Credit Can Be A Very Big Deal
Bad credit (or non-existent credit) takes time to change and if you wind up in a position where you need a loan it can cost you quite a lot.
Tom and Sally are 30 years old and have had a credit card or two. They’ve missed a payment once or twice, got married a year ago (what were they thinking?!) and have a kid on the way.
Time to buy a house. Tom and Sally find a nice $750,000 house for their budding family, scrape together $150,000 for a down-payment, and just need a mortgage to cover the rest.
They saw an ad for a 3.7% 30-year fixed-rate mortgage, but unfortunately Tom and Sally won’t qualify for that mortgage.
Tom and Sally have a 650 credit score and get offered a 5% 30-year fixed-rate mortgage. Phew! They happily book the loan and close on the house.
Maybe Tom and Sally love their house, live a great life and will never think about their 5% rate or how much that credit score costed them. Too bad I’m here to let them know right now.
Here’s the math
Tom and Sally’s loan was $600,000.
Their interest rate was 5% annually and the term was 30 years.
Their monthly payment was $3,220.93 meaning that over 30 years Tom and Sally made payments totaling $1,159,534.71.
Mr. And Mrs. Excellent Credit got the same loan for $600,000
Their interest rate was 3.7% annually and the term was 30 years.
Their monthly payment was $2,761.70 meaning that over 30 years Mr. and Mrs. Excellent Credit made payments totaling $994,211.25.
Bad Credit Hurts
Over 30 years Tom and Sally paid $165,323.46 more due to mediocre credit.
Easily enough to buy a brand new Maserati GranTurismo.
While that hurts badly enough for Tom and Sally, I hate to say that I’m not quite done.
You see, Mr. and Mrs. Excellent Credit actively followed the Let’s Be Millionaires blog and knew to invest that $459.23 that they saved every month relative to Tom and Sally, and they earned 10% doing so.
So in reality, while Tom and Sally paid $165,323.46 more over 30 years, Mr. and Mrs. Excellent Credit were worth $1,038,088.01 more.
That is just one example of how much bad credit can really cost you. Make smart decisions and commit to building your credit score today. If you haven’t checked your credit score head over to Creditkarma.com and find out where you stand!
Don’t be like Tom and Sally.
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