Imagine there is a knock on your front door and when you answer a complete stranger says I want $3.23 and I’ll be back again tomorrow for another $3.23 and the day after that, in fact I’ll be back every day for the next 5 years for my $3.23. You would probably slam the door in his face and maybe even call the police. You would be even more upset the stranger demanded $9.40 a day and you might be driven to rage if he insisted that you fork over almost twenty bucks a day! Still if you are an average American with less than outstanding credit you are giving away $5, $10, $20 or more every day to complete strangers.
The Cost of Modern Life
Living on borrowed money is a reality of modern life. Is it possible to live without accruing any debt, sure, but that’s another article. Today we’re talking about the majority of Americans who carry debt as part of their lives and debt, whether it is from credit cards, car loans or a mortgage comes at a price which we call interest.
How much we pay in interest depends entirely on how good we have been in the past about repaying our obligations. The more diligent we are in paying our bills the better our credit scores and as well all know credit scores are what lenders use to decide how much to charge us for using their money to buy things like cars, and clothes and houses.
The Cost of Bad Credit
What many people underestimate is the cost of less than perfect credit. Every little tick in interest rates for credit add up and they add up far more quickly than you might realize. Remember the first paragraph of this article and the rude stranger at the door demanding $3.23 a day for the next five years. That man was the banker.
Let me explain. The average new car price last year was just over $30,000 and someone with good (not perfect) credit could get a 60 month car loan for about 3%. That’s not you. You’re credit isn’t horrible but it’s not great so you have to pay 10% which is going to cost you an additional $3.23 per day every day for five years.
Big deal you say, that’s not so terrible. I drive a Buick and I like it just fine, thank you. Suppose you like the Buick Lucerne which costs just under $30K but you really love the Lexus IS 250 which is just under $36K. The difference in price between the Buick and the Lexus is $6000 which is $3.28 per day for 5 years. If your credit were better you could be driving your dream car for the same cost as second or third choice.
We buy more than cars on credit we use credit cards everyday for everything and with the average credit card balance of $15K if you stopped charging tomorrow, I’ll wait for you to stop laughing, and wanted to pay off your balance in just three years you would have to put up an extra $2,100 because you’re credit is not so hot. That’s more than half the difference between being able pay for the Lexus instead of the Buick.
The Money Pit
The single biggest purchase we make in our lifetimes are our homes and with an average home price of $189K with 20% down the average mortgage amount is a little more than $150,000. When it comes to mortgages the numbers are striking because mortgages are usually over such long periods of time, typically 30 years.
The difference between interest rates for people on the better end of average are 4% and at the low end of average are 7% which comes out to an extra $102,000 over the course of the mortgage. That’s not total interest that just the extra you pay for bad credit. You could go on nice vacation every year for 30 years just on the difference in interest.
The cost of bad credit will affect your entire life, today, tomorrow and after you retire, and here’s how much. Let’s say you’re 35 married and have 2 children. You have $15,000 in credit card debt, $150,000 mortgage and you just purchased a brand new Buick Lucerne. Oh and you have bad credit.
For the sake of comparison you also have an identical twin with whom you are identical in every way, same income, say house, both married with 2 children, and everything is the same except your twin has good credit.
Your twin however drives a Lexus and goes on a 7 day cruise to the Caribbean every January. Your twin and his wife have go to a bed and breakfast at the beach for their anniversary and when they retire in 30 years they’re going to have an $1,800 more a month to live on than you.
Less than perfect credit, even bad credit can always be fixed and the first step is understanding just what your bad credit is costing you. As your credit improves so will your lifestyle and you’ll enjoy more bang for your buck.
Photo Credit: sharahayden