You’ve heard that bad credit will cost you, but exactly how much?
A 2016 study conducted by Syracuse University found a staggering difference in the interest paid on credit cards and student loans by a person with bad credit and another with good credit.
For instance, a credit card issued to someone with bad credit (typically a score of 600 and below) has an average interest rate of 22.99 percent, the study finds. And a person with good credit? He or she would get an average interest rate of 9.99 percent.
Using $7,813 as the average credit card debt for an American household and a minimum payment rate of 4 percent, the person with good credit would end up paying $1967.87 in interest. The person with bad credit would pay $6,841.18 in interest charges on that credit card debt. How much does bad credit cost? In this case, nearly $5,000 more.
Now consider student loans. A person with good credit might secure a 10-year student loan with a 4.29 interest rate, while the student with bad credit might only be able to land a 10-year loan with a 10.29 percent interest rate.
That means the student with good credit would pay $159,633.37 (with interest) for her degree. The student with bad credit would pay $208,058.61 to earn his degree. The result: Bad credit could cost you an additional $48,425.24 in interest charges.
Non-financial costs of bad credit
The costs of bad credit could be even larger than those out-of-pocket interest payments, says MaryAnn Monforte, professor of accounting practice at Syracuse University’s Whitman School of Management/Accounting@Syracuse.
“When most people think about bad credit scores they think about their impact on the ability to borrow, but one thing they don’t think about is the impact on their careers,” she says. “Prospective employers will check credit history, particularly in the finance and insurance industries.”
Yes, that’s right — would-be employers in certain industries can ask to check your credit report and may factor any credit hiccups you had in the past in the hiring decision. It’s important to note, though, that a potential employer first must get your authorization to pull your credit report.
The bottom line: Whether you’re trying to get a credit card, secure a student loan or land a job, bad credit will cost you more.
How to move from bad credit to good credit
If you have a bad credit score, you can take steps to repair your credit. How do you do this?
If you have credit cards, pay down card balances. Pay in full and on time every month. And keep your credit utilization low – the percentage of your credit limit that you are using. Many credit experts suggest keeping your credit utilization ratio under 30 percent. Do all of these things routinely and your credit score should rise.
Monforte has another bit of advice for young people looking to create a positive credit outlook. “Be wary of having too many credit cards,” she says. “Too much open revolving credit does not look good on your credit report
“Be selective of the cards you choose,” she says. “Use them, pay them off, and be timely with your payments and you will be on the road to establishing good credit and a good credit score.”
