Oct. 16 is Get Smart About Credit Day. Yes, apparently there’s a day for that! We hear about how important it is to have good credit all the time. What we don’t typically hear is what happens if we have bad credit. Let’s go through a few examples of the additional costs of having good credit and bad credit.
1. Car loan
The average new car loan in America is $41,983. The average term is 68.9 months. Those with bad credit currently pay an average interest rate of 13% vs. those with prime credit who pay an average of 5%. Here is the payment breakdown: Those with bad credit pay roughly $8000 more over the term of the average car loan. Let’s assume that this person buys eight cars over their lifetime. This equates to an additional $64,000 in interest, assuming all costs remain the same.
2. Mortgage
For this example, I assumed a $300,000 30-year mortgage. I further assumed an additional 2% interest rate (9% vs. 7%) for the subprime borrower. In this example, those with bad credit would pay approximately $150,000 more in interest over the term of the loan. For this example, I’m ignoring the possibility that the average person doesn’t hold a mortgage to maturity. Let’s assume two mortgages over a lifetime, for a total of $300,000 in additional lifetime interest payments.
3. Credit cards
If we assume an average credit card balance of $10,000, a subprime borrower will potentially pay an additional $10,000 in interest over a 20-year term. This could translate to $20,000 over a lifetime.
4. Personal loans
The average person takes out three personal loans over their lifetime. This could be for things like home improvement or college costs. Personal loans can really highlight the difference in additional interest rates. Over the life of those three loans, subprime borrowers can expect to pay an additional $20,000.
5. Car insurance
Additional costs of having bad credit can include higher car insurance rates. While this is often a controversial topic, the research shows that low credit scores are highly correlated to higher can insurance claims.
Let’s sum up the costs of bad credit:
- Cars: $64,000
- Mortgages: $300,000
- Credit cards: $20,000
- Personal loans: $20,000
The total lifetime cost of bad credit can equal $404,000! This is a staggering number for someone buying the exact same things but simply having poor credit. Life is really expensive to begin with. Poor credit makes it significantly more expensive. Be diligent about getting and keeping your credit score up. It will save you a fortune over the long run.
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.
