Before recently, it was hard to predict how a certain mistake would affect your credit score. So, if you missed a credit card payment, you wouldn’t know how much damage your credit score would receive until you actually checked your score and saw the number.
Credit Score Points Lost From Bad Decisions
Fortunately, several months ago FICO revealed just how many points you’d stand to lose if your credit score was affected by certain actions. The information gives us a whole new perspective on how bad decisions really affect our credit standing. The point values revealed are approximate and depend on where your credit stands now. People with higher credit scores stand to lose more points from bad decisions than people whose credit score are already low.
For example, if you:
- Decide to max out your credit card, you could lose between 10 and 45 points. Skip your minimum payment this month, your credit score could fall between 60 and 110 points.
- Settle a debt for less than the balance due instead of paying it in full, your credit score could drop between 45 and 125 points. And that’s just for settling one credit card debt.
- Fall behind on your mortgage payments and eventually go through foreclosure, you can expect a drop between 85 and 160 points.
- File bankruptcy instead of settling your debt or paying in full, your credit score might drop anywhere from 130 to 240 points.
The Monetary Cost of Bad Credit
You’ll never truly know the benefit of having a great credit score until you experience life with a bad credit score. Even services that have nothing to do with your credit score suddenly cost a whole lot more once you have bad credit. It’s not just one-time fees. There are recurring services that penalize you for having bad credit. If you’ve had bad credit for awhile, you may not even realize you’re paying extra. Here are some of the ways.
Housing. People with bad credit often have to rent a home or apartment because they can’t qualify for a mortgage. While renting has its perks, renters don’t get a tax break for rent payments the way homeowners get for paying mortgage interest and property taxes. That means higher income taxes.
If you do get approved for a mortgage despite bad credit, you’ll typically pay a higher interest rate than a borrower with better credit. The result could mean a $150 monthly difference on a $150,000 30-year fixed mortgage. If you never refinance for a better rate, you’ll pay almost $60,000 more by the time 30 years have passed.
Transportation. A similar situation happens when you’re car shopping. The cost of buying a car is $50 to $100 higher per month for people with bad credit. The price is worse if you shop at a buy here, pay here lot.
Insurance. Most states require you to have car insurance and if you still have a loan, the bank will make you have full coverage. Insurance companies rely on credit history and you could pay $10 to $50 more per month for auto insurance.
Other ways you pay for a bad credit score:
- Security deposits on electricity, cable, or cell phone service. The amount varies by provider, but could be from $50 to $200. You could even get hit with a deposit mid-service if you fall behind on payments.
- High student loan interest rates, resulting in $50 to $150 more per month on an $8,000 private loan.
- Credit card finance charges, resulting in $50 to $75 more per month
The total monthly cost of bad credit ranges from about $300 to $550 per month, but it could be more depending on your interest rates and the amounts of any loans or credit card balance. The reality is that many people with bad credit can’t afford the extra cost and are forced to live without extras in life. Perhaps that’s the biggest cost of all is the inability to buy and enjoy the things you truly want.