As you pay your bills month to month, you can sometimes lose track of how much your lifestyle costs you. By now, you've most likely adjusted to the price of things, and the types of terms you are normally stuck with for most of the things you obtain on an usual basis. In this next portion of your credit education, we will take a side by side look at the difference in price between like items for people with good credit, and people with bad credit or no credit.
Expense Number One: Housing
Most often, this is the expense that makes it easiest to see the difference between good credit and bad credit.
When a person has bad credit or no credit, you can expect not only higher rent amounts, but higher deposits. In most cases, qualifying for a home loan is out of the question, so you're stuck with paying rent that isn't tax deductible. How bad does this hurt you in reality? In order to produce the revenue to pay your rent and the taxes on the money you paid the rent with, you would have to earn anywhere from 20% to 40% more than your rent payments, since you don't get to deduct the taxes. That means that in order to pay rent for $1,000 a month, you have to earn anywhere from $1,200 to $1,400 a month depending on your tax bracket, and it could be even more.
With good credit, you can look forward to lower deposits, lease amounts, as well as much easier access to all the things that come along with home ownership like tax deductible mortgage payments. A $1,000 mortgage payment is, in most cases, nearly completely tax deductible. This means that you really only have to earn just about the same amount of money to make the payment.
Savings from this example: $200 - $400 a month in tax savings, as well as many other savings from lowered lease terms, deposits, etc
Expense Number Two: Loans
Whether it's the loan on your house, your car, your education, or just your credit cards, having bad credit can have a detrimental effect on your borrowing ability as well as the interest rates you have to pay. If you can qualify in the first place, your payments are almost certain to be much higher.
At the time of this writing, rates for home loans for good credit borrowers are offering interest rates around 4.5%. Borrowers with bad credit can be as high as 10% or more. On a 30 year fixed loan of $150,000, a borrower at 4.5% will have a monthly payment of $760. A 10% interest rate on the same loan will hike up your payment to $1,316.
The same story applies with auto loans, student loans, and credit cards, and many more. A borrower with bad credit can easily pay $150-$300 a month more for an average vehicle.
As of this writing, the average credit card debt per household is $8,329. A card with that balance carrying a 4% interest rate, typical for card holders with excellent credit, brings a payment of $111. Credit cards for people with bad credit can easily range around 23% which brings a payment of $243.
Savings from this example: $556 a month for the home loan, $150 - $300 a month for an auto loan, and $132 a month for credit cards. That's a total savings of $838 to $988 monthly.
Expense Number Three: Auto Insurance
There is a plain and simple truth: If you want to drive legally, you must have auto insurance. A recent trend with a lot of companies is to charge higher premiums for insurance for drivers with bad credit than those with good credit. The companies that don't check your credit will almost always have higher rates to start with. Drivers with bad credit can count on paying anywhere from 20% to 50% higher premiums than drivers with good credit, or virtually turning a $100 premium payment into a $120 to $150 payment.
Savings from this example: $20 - $50
Total Savings from all examples: $1,058 - $1,438.
Over the long run, the difference can be brutal. Taking the $1,058 example and rounding down for the sake of simplicity to $1,000, You are looking at $12,000 a year in lost savings. That's $120,000 per decade, and $480,000 across the span of 40 years, the timeframe of someone between ages 20 and 60. Any financial analyst will tell you that not investing that amount of money properly will, through the course of your life, literally result in you losing millions of dollars in potential growth, and would probably make the difference between whether or not you are ever able to retire.
The good news: It's not hard to learn how your credit works and, if need be, how to repair it. It simply takes the (rather small) effort of investing in your credit education.
Author Resource:
Behind the scene secrets from the industry professionals themselves are available at Credit Education: Guides and Workbooks . This article has been abridged to fit the layout of this website. For the entire, original article, containing extra supporting information and resources, please visit Credit Education: How Much Does Bad Credit Cost You? .
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