Having a low credit score comes at a double cost. It can be more difficult to access financial products (such as credit cards, home loans and car financing) if your credit is less than stellar, and usually, the products end up costing more. It’s a tough situation, but understanding the costs of a low credit score can help you understand why it’s so important to pay off debts and boost your credit score wherever possible.
Read on to learn more about the costs of low credit score, and click here for a few tips on how to improve your credit history.
Higher Interest Rates
The number one cost of having a lower credit sore is higher interest rates. When your credit score is lower (650 and under), most lenders and banks classify you as a riskier borrower—which means they will charge higher interest rates to protect themselves. For example, the National Association of Realtors estimates that a homebuyer with an excellent credit score can secure a mortgage interest rate of around 4.82%, whereas a homebuyer with a score of 620 can expect a 6.41% interest rate. This equates to a difference of more than $100,000 in total interest paid. HUECU offers members the same rate for mortgages, auto and personal loans.
Limited Access to Financing
Most of us need some access to financing, or in other words, the ability to borrow money from a lender. Financing helps people purchase a house, car, large appliances and so on, even if they don’t have cash in-hand. Having low credit score limits your access to financing. Many lenders won’t approve a loan for borrowers with low or no credit, and getting a credit card is likewise more difficult.
This lack of financing access comes with a lifestyle cost: you might not be able to purchase the things you want. There’s also a financial cost, because where financing is available for borrowers with low or no credit, it usually comes with higher interest rates. Sadly, predatory terms are also common—so if you have a lower credit score but still want to borrow money, choose your lender very carefully and be wary of lending deals that sound too good to be true.
Large Minimum Payments
A minimum payment means the smallest amount required for a period (usually monthly) by your credit card issuer or other financial lender, such as on a car loan or home mortgage. If you can’t pay off your entire balance, but you can make the minimum payment, you’ll avoid late fees and other penalties. Unfortunately, people with lower credit scores often get stuck with higher minimum payments. Again, this has to do with risk: the lender is seeking protection against the risk that a borrower with lower credit will default on the loan.
If you’re having trouble making minimum payments for a loan or credit card, keep in mind that some payment is better than no payment. Every dollar you can put toward a minimum payment shows the lender that you are committed to settling your debts, which can help in the future if you need to negotiate a separate debt repayment plan.
Fewer Credit Card Rewards
Consumers with higher credit scores tend to qualify for credit cards with more benefits. Getting a gold or platinum card isn’t just about status—it means lower annual fees, more perks, and a lot more rewards. Credit card holders with higher credit scores can usually qualify for a card offering at least 3% cashback on purchases, whereas cardholders with a lower score can’t access these rewards. Losing out on cashback means a difference in what’s in your bank account every month, which is just another way that lower or no credit costs more.
Potential Impact on Job Opportunities
Prospective employers may ask you to provide a copy of your credit report, in order to verify your identity and background, and as a means of evaluating your trustworthiness. If a potential employer sees evidence of financial distress, they may interpret this to mean that the candidate is less responsible than a candidate with a higher credit score. The fairness of such practices are up for debate, but if you have lower credit score, it’s something to look out for and certainly another reason to look at repairing your credit history however possible.
A benefit of Credit Union membership is access to the GreenPath Financial Wellness Program. To speak with an accredited credit counselor about your credit or other financial situations, call a GreenPath Financial Counselor at 877-337-3399.