By Eric Reich
We all know that we should strive to have good credit, but why? What is the reason good credit is so important? This week, I decided to calculate what the average household would pay for a mortgage, car loan, and credit card if they have good credit and compared that to what they would pay with bad credit.
Let’s start with the assumptions. I took the average mortgage, average car loan, and average credit card debt in America. Then I researched what the interest rate would be for each, assuming a credit score of 780 vs. a score of 625. I then added up all the additional interest costs that someone with a 625 score would pay over the life of the loans. My conclusion is that it is far harder to get ahead in life if you have a low credit score. Let’s break down the numbers.
- Mortgage: The average mortgage taken out in America is $329,854 according to Statista. Based on a current interest rate of 6.25% for a 30-year mortgage which is the average rate for a Tier 1 credit score, that borrower will have a monthly payment of $2,031 per month (principal and interest) and will repay a total of $401,293 in interest. By comparison, someone with a 625 credit score pays an average of 7.4% interest, which equates to a $2,283 payment, and repays a total amount of interest of $492,332. This means the borrower with lower credit pays an additional $252 per month and over $91,000 more in interest over the life of the loan.
- Car loan: The average car loan in America is $40,927 according to Bankrate. A Tier 1 borrower would pay $658 per month for 72 months at a current rate of 5.25% and pay a total of $6821 in interest. A lower-tier credit borrower would pay $749 per month for the exact same car at a 9.83% interest rate and pay a total of $13,312 in interest over the life of the loan. That equals an additional $91 per month and a total of $6,491 in additional interest payments.
- Credit cards: The average credit card balance in America is $8,674. The current interest rate for a Tier 1 customer is 19.99% vs. 29.99% for a lower-tier customer. Based on the average balance, the Tier 1 customer would pay off their card in 165 months (13.75 years) and pay a total of $5,990 in interest. That’s assuming they are making the minimum 4% of the balance payment. The same lower-tier credit customer would take 246 months (20.5 years) to pay off the same balance and would pay a total of $13,929 in interest. This equates to a difference of nearly seven years of additional payments and $7,939 of additional interest.
As you can see, the cost of having poor credit is high. The person with lower credit pays around $350 more per month, pays the same credit card for roughly seven years longer and will pay an additional $105,469 for the exact same purchases. Having good credit is key to not only helping you save money but also to having more choices for the credit that is available to you.
Things that affect your credit score the most are your payment history, your total amount owed, your length of credit history, new credit taken out, and the types of credit you use. Be mindful of these things and use them wisely to both improve your credit score, as well as save money on all of the credit you use.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Reich Asset Management, LLC is not affiliated with Kestra IS or Kestra AS. The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. To view form CRS visit https://bit.ly/KF-Disclosures.
Eric is President and founder of Reich Asset Management, LLC. He relies on his 25 years of experience to help clients have an enjoyable retirement. He is a Certified Financial Planner™ and Certified Investment Management AnalystSM (CIMA®) and has earned his Chartered Life Underwriter® (CLU®) and Chartered Financial Consultant® (ChFC®) designations.
