Bad Credit: How Much Is Bad Credit Costing Me?

How can you tell if you are eligible for a prime loan, or if your credit is not good enough to get one?

  • Unsecured financing is required if your FICO scores are below the average.
  • If your credit score is “right”, you might need to borrow money for bad reasons.
  • Recent events like foreclosures, bankruptcies and write-offs make borrowing difficult

Sometimes, just one point can make a difference in your credit score and help you save thousands.

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Prime loans require credit scores

There is no common definition of “prime loan”. Every lender can set its own criteria for what loans are considered “premium”.

The term usually refers to a loan that is the most advantageous for a consumer. It is usually accompanied by low interest rates, and sometimes other benefits.

One exception is to the “best offer” rule. Lenders may offer high-yield loans, and the best deals are made to those who qualify. However, any prime loan is attractive by definition.

Which scores are eligible for blue-chip loans?

FICO is the company that developed the most popular credit scoring technology. The company categorizes credit scores in the following:

  • 800+ – “Exceptional” Surprisingly 20 percent of Americans have scores of 800 or more. One in 850 has a score of 800 or higher, which is the highest possible. Lenders love these borrowers, and are willing to offer them great deals.
  • 740-799 – “Very well.” Your credit score is still high and you have a very low chance of default. Lenders still love you and most of them will consider you a prime loan applicant. This group comprises twenty-three percent.
  • 670-739 – “Good.” Your loan may be in default for as much as 8%. This means that only certain lenders will consider you eligible to receive a prime loan. This group makes up 24 percent of the total population.

Related: How Much Credit Do You Need to Get a Mortgage?

You should know that many of us have different credit scores. There are many rating systems providers and credit bureaus that offer different ratings. Also, there are various versions of industry-specific rating systems. An auto lender might use a modified proprietary version to better predict defaults on auto loan loans.

Some lenders prefer older versions of credit score systems, which may have lower scores than those from modern systems. You shouldn’t assume the credit score you receive from a credit score provider will match that of a potential lender.

Who is eligible for bad loans?

It would be easy to believe that only those with low credit scores would qualify for bad credit loans. However, some lenders will grant these loans to people with good credit scores. A Fannie Mae and Freddie Mac mortgage can be obtained by applicants with a lower credit score than 620, provided they pay a higher down payment.

FICO defines these lower ranges as follows:

  • 580-669 – “Fair”. This score range represents 16 percent of the population and will result in 28 percent default. Lenders are cautious. You might be able to find a loan source that lends you money on terms better than a loan for bad credit. There is no guarantee.
  • 579 or less – “Poor” This group represents 16 percent of the population and more than 60 percent of borrowers default on their loans. Lenders will typically deny requests if they are faced with the risk of default. Lenders who agree to pay high interest rates in order to cover their losses are subject to denial.

Related: These 3 Problems Can Be Solved to Improve Your Credit Score Faster in 2018

FICO states, “The good news for this group” is that they have the potential to improve their credit ratings.

Are you a thin person?

Many people are not at fault for their low scores. There have been times when luck was not on their side, such as a time of unemployment or illness.

Some people simply don’t have enough information about their credit history to allow scoring algorithms to accurately calculate their creditworthiness. This is known as having a “thin credit file”.

This can be especially problematic for young people who haven’t borrowed much yet. This can also be a problem for older people who haven’t borrowed in recent times. Non-borrowers may also be affected.

Related to Catch-22: You Need Credit To Get Credit. Here’s How to Do It

This might sound like a trap. You can’t borrow money without having a good credit score. And you can’t borrow to get a good credit score. A secured credit card is a great way to build your credit. The card issuer will require a deposit. You can then charge purchases up to the deposit amount.

You may also have to pay interest if you “borrow” money. Your credit score will improve if you provide your card reports to all three major credit bureaus.

Cost difference between prime loans and poor loans

Your credit score will affect your ability to repay all your loans. This is true for everything, from mortgages to credit card and auto loans to home equity credit lines.

As you can see, the cumulative effects of having a lower score over a lifetime add up. Over that period, some could lose as much as a hundred thousand dollars. You can borrow hundreds of thousands if you’re a large borrower.

Your credit score and mortgage costs

FICO offers a calculator that will allow you to calculate the costs of a mortgage depending on your credit score. These calculations were based on mid-June 2018 mortgage rates, but they may have changed in the future.

Related: Get Your FICO 100 points in 2018 and Save Big on Everything

According to Experian, the national average mortgage debt was $201 811 in January 2018. Let’s say someone borrowed $200,000 and got a 30-year fixed-rate mortgage at a rate of $30,000. This calculator shows that someone scoring between 760 and 850 could qualify for the following offer:

  • A rate of 4.322% APR
  • Monthly payments of $ 992
  • Over 30 years, total interest: $ 157 238

This loan is available to anyone with a score of between 620-639. (A lower score is unlikely to be approved).

  • Rates starting at 5.911% APR
  • Monthly payments of $ 1188
  • Over 30 years, total interest: $ 227 565

This means that the borrower with a low credit score will pay more than $70,000 in additional credit fees over the loan’s life.

Auto loans and other financing

A score can affect more than just your mortgage payments. FICO estimates that an individual with good credit could borrow $ 10,000 to finance a 60-month car loan. The interest rate for the five-year period would be $ 1,076. However, a loan with the same interest rate would cost someone with a credit score of 500 to 589 $ 4,620. That’s more than four times the amount!

Related: What is a good FICO score?

Let’s say you have eight auto loan in your life. This would mean that you would have lost nearly $30,000 It’s not just auto loans and mortgages that are affected. For every dollar borrowed, you’ll pay more – even more for rent or insurance premiums.

Average credit scores in America

You probably don’t care much about average credit scores. Your main interest is in you.

Time Money released an analysis of age groups in April 2017. This allows you to see how you compare with your peers.

  • 652 for 18-29 year olds
  • 30-39 years: 671
  • 60-49 Years: 685
  • 50-59 Years: 709
  • 60+: 743

In 2017, the average score for all Americans was 700.

Young people with low scores are the lowest

Why is it that young people are less successful? They are not fickle, it is likely.

They can have very thin files, for starters. They won’t have an older median age than their open accounts yet, which is 15% of FICO scores.

They may not have a balanced “mix” of revolving (mainly credit and cards) and installment loans such as mortgages and auto loans. This mix makes up 10 percent of your FICO score.

A higher score can help you save a lot of money, regardless of your age. This is something you should take seriously. Bad loans shouldn’t be a burden on your life.