How Much Will a Bad Credit Score Cost You?

The average price of a property in the United States is $300,000. The costs of earning a college diploma can easily exceed $100,000. A new car may even cost more than $30,000.

Did you know you can save a great deal of money on these typical costs by maintaining a good credit score?

A good credit rating decreases the cost of a car loan by 10% and reduces the amount of interest paid on college tuition by half. It will give you leverage when seeking employment. Studies have shown that one in ten people are denied job positions due to their bad credit. This is common, especially with employers in finance and insurance industries who are known to check an applicant’s credit history and use it as a measure of gauging how he or she can perform their job functions.

Read on to find out what a credit score is, its components, and why a good credit score is important.

What Is a Credit Score?

Your credit score is a numerical rating ranging from 300 to 850 that shows lenders your financial risk. In other words, a lower score suggests that you might not be a reliable borrower.

Companies use different categories to classify risk, but generally the spectrum looks like this:

A low credit score can lead to being denied access to loans and can prevent you from leasing out apartments. But that’s not all. It can also be costly—even if you are granted a loan, your interest rate will be higher compared to others with better credit scores.

How Do You Calculate a Credit Score?

The FICO method is often used to calculate a credit score, which is based on the data collected by the three major credit bureaus in the United States: TransUnion, Equifax, and Experian.

This method uses five key factors when determining an individual’s score:

  1. Payment history – 35 percent: This is the most critical factor in your credit score, as it tells lenders if you have a history of paying off your debts on time.
  2. Amounts owed – 30 percent: A large debt is not necessarily detrimental to your credit rating. FICO analyzes your “Credit Utilization Ratio,” or the percentage of credit you have currently in use. So, if you have a credit limit of $1,500 and a balance of $1,400, it might negatively affect your score.
  3. Length of credit history – 15 percent: Generally, the more extended your credit history is, the better it is for your rating. Don’t be discouraged if you are just starting to build your credit history; you can still maintain a good score by paying attention to other criteria.
  4. Credit mix in use – 10 percent: This criterion evaluates the types and number of credit accounts you have. It’s a good idea to maintain credit accounts, but don’t open one you don’t plan on using.
  5. New credit – 10 percent: Obtaining too many new lines of credit in a short period can have a negative impact on your credit score. Despite rumors that credit inquiries are damaging, they usually have little to no effect.

It’s important to note that credit scores are only one element that loan providers examine. They will likely look at your wages, debt-to-income(DTI) ratio, and how long you have been employed, together with your credit score, prior to granting a line of credit.

How Can I Get My Credit Score?

Every 12 months, you have the right to obtain one credit report from each of the three bureaus without charge. To gain access to your credit score, though, it is likely that you will be required to pay a fee. However, there are banks that offer free credit scores as part of their membership benefits. Alternatively, you can purchase your score directly from FICO or find a credit report monitoring service that appeals to you and buy a subscription.

Did you know, up to 80% of credit reports have serious mistakes? You need to pay attention to all details on your report. If there is an error, services like HigherScoreNow provide credit auditing services at a small fee to get erroneous information on your credit reports corrected. 

Why Should You Want a Good Credit Score?

  1. It will enable you to rent out an apartment easily. According to Experian, the minimum credit score you need to qualify for an apartment is 620. However, more strict property management companies require a credit score above 700. A bad credit score will increase your security deposit and may require a cosigner.  
  2. It will enable you to get the best rates on cars and homeowners insurance, saving you cash that can be used for other expenses.
  3. You will get low-interest rates on personal loans. Negative credit can lead to higher interest rates and even make it hard to secure a loan.
  4. It will develop your reputation and increase the chances of an employer hiring you.

Bottom Line

A good credit score impacts nearly every aspect of your life.

Do you need support in building your credit score?

Schedule a call with HighScoreNow!

Thank you for reading our article. We hope you learned new ways to battle creditors and banks while protecting yourself.

We would encourage you to become a member of and start to leverage all the benefits of having good credit. You deserve this.