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Why You Should Improve Your Credit Score

Are you one of those people who plan to go through life with bad credit?  From credit cards to mortgage loans and everything in between, people with poor credit pay much more for goods and services purchased over time than those with excellent credit. The information below should convince you it's time to earn and keep an excellent credit rating to save yourself thousands of dollars over your lifetime.

Mortgage Loans:  Because homes are so expensive today, mortgage loans involve a large amount of money and as a result, even a one-half percent variation in the mortgage loan interest rate is significant.  In some areas of the country, homes are so expensive that just a tiny increase in the interest rate adds hundreds to your monthly mortgage payment. 

Consider the following hypothetical situation:  Person A with excellent credit obtains a mortgage at 8% and Person B with not so good credit obtains a mortgage at 10%.  Person A and Person B each borrow $100,000.  Person B with bad credit will pay $21,412.80 more on a 15-year mortgage and $51,843.60 more on a 30-year mortgage.  Note the difference in monthly payments.

Person A           Person B                Difference

Monthly payment on a 15-year mortgage$955.65             $1,074.61              $21,412.80*
Monthly payment on a 30-year mortgage$733.76             $   877.57              $51,843.60**

* [$955.65 x 180 months] - [$1,074.61 x 180 months]
** [$733.76 x 360 months] - [$877.57 x 360 months]


Auto Loans:  Suppose two people purchase identical cars from the same car dealership. Both apply for auto loans in the amount of $18,000 and each plans to repay her loan over a three year (36 month) period.  The only difference between the two people is that Person A has an excellent credit rating and Person B has a bad one.  Person B will have to pay a higher interest rate because she has a lower credit score.  What will be the difference in total price paid for their cars?

To illustrate this, we will use an auto loan interest rate of 7.30% for those with excellent credit and 20.95% for those with bad credit.   Using the same terms as set forth in the paragraph above, the person with excellent credit will have a car payment of $532.07 per month.  The total price paid for her car will be $19,154.52.  The person with bad credit will have a monthly car payment of $677.69, which is $145.62 more each month than the person with excellent credit.  The total price paid for her car will be $24,396.84.  What has a poor credit rating cost Person B?  In this case, the person with bad credit will pay $5,242.32 more for the very same car that the person with excellent credit purchased.   She will also likely pay a higher insurance premium.

Perhaps you're thinking that your credit isn't that bad, certainly not bad enough to warrant financing at a 20% rate.  You could qualify for a loan at 13%.  Well, even at 13%, you will pay $2,679.16 more for the same car than will Person A with excellent credit.

In the real world, the difference is even greater since people who obtain financing at a lower rate can afford to pay off their cars one, two or even three years earlier than the person with bad credit.  The person with poor credit must stretch out his loan over a longer period in order to afford the monthly payments, perhaps five years instead of three, thus driving the finance charges through the roof.  This is illustrated with the following example.  At 13%, borrowing $18,000 for a term of 36 months (3 years) would require a $606.49 monthly payment, while repaying the same loan over a 60 month (5 years) period reduces the monthly payment to $409.56. You might not be able to afford the car unless the payment is $409.56, but taking two additional years to pay it off is going to add $2,739.68 in extra finance charges to the price of the car.

Insurance:  Most people aren't aware that, in most states, their credit scores are evaluated when they apply for any type of insurance, particularly auto insurance.  Credit scores are relevant to the insurance industry because the insurance industry has found a correlation between insurance claims and credit scores.  The insurance industry claims that those with low credit scores are much more likely to file insurance claims; therefore, they should be charged a higher insurance premium.  How much more are those with low credit scores charged?  Sometimes as much as four times more if insurance regulations in your state allow them to do so!  Almost all states (except Michigan) allow insurance companies to use a credit score in determining insurance premiums; however, some states put a cap on just how much they can charge.  As a result, those with low credit scores usually have to pay a monthly insurance bill that is two to four times higher than those with high credit scores.  Improving one's credit score could save $10, $40 or even more per month in car insurance.

Credit Cards:  Almost all credit card agreements come with a "universal default" provision giving the credit card issuer the right to raise the cardholder's interest rate if he misses a payment or defaults with any creditor whatsoever, be it on a mortgage or auto loan or other credit card.  Many credit card issuers review their customers' credit reports on a regular basis looking for negative information.  If they find a cardholder who has accumulated too much debt or defaulted with another lender, they reserve the right to raise the interest rate on the credit card significantly, sometimes from a low 5% to an unbelievable 30%.  Those who carry big balances on their credit cards month-to-month can be financially devastated when their low credit scores result in a huge interest rate hike adding $10 to $400 a month onto the minimum credit card payment.

Employment:  Although it is illegal for employers to discriminate against those who have filed bankruptcy, employers can and do discriminate against those with bad credit ratings, they just don't admit it.   Since so many employers refuse to say anything at all about the work performance of their employees to protect themselves from lawsuits, prospective employers have no way of assessing a potential hire's character other than how they pay their bills.  So employers look at applicants' credit reports.  If an applicant has a bad credit rating, the employer assumes he has a bad character, so he he might not get the job. 

The military routinely disciplines its personnel for not paying their debts as agreed.  In fact, one can be denied enlistment or dishonorably discharged for having a bad credit rating.  Naturally, the FBI and CIA also discriminate on this basis, as does many government agencies.  One can't work for a bank or other financial institution if one's credit report reveals too much debt or negative information.

Improve Your Credit Rating Now!

Obtaining an excellent credit score can take anywhere from two months to three years depending on how low it is at the present time.  You should start working on raising your credit score now because the quicker you get it over 700, the sooner you can start saving money.  If you have a bad credit rating, it will take longer to undo the damage; however, you can start improving your credit score just by paying your bills on time as agreed and not accumulating anymore debt for a six month period.  At the end of six months, your score will be a little higher.