Unfortunately, the difference between a good and a bad credit score can cost you almost $400,000 in your lifetime. This effect is much less between high and normal credit scores, but even so, interest payments can cost you tens of thousands of dollars.
Mortgage interest can eat into your decade’s income
According to new research from fintech company Self, the average American will pay about $130,461 over their lifetime in interest fees. The breakdown by FICO credit score is as follows:
- less than 620: $486,040
- 620–639: $158,512
- 640–659: $133,828
- 660–679: $114,803
- 680–699: $105,291
- 700–759: $98,045
- 760–850: $88,388
The interest due on the lowest credit scores is 9.4 years of wages for the average full-time worker.
Borrowers with a credit score below 620 cannot qualify for conventional loans and are forced to take out subprime mortgages at much higher interest rates, costing them much more. That is why it is so important that your credit score is above 620 before you can apply for a mortgage.
No score and a bad score
A person without a score and a person with a bad credit history face the same problems arising for different reasons.
FICO, the most commonly used credit score model, requires you to meet three criteria to create a credit score:
- At least one account must be open for at least six months.
- At least one account must report activity to the credit bureau within the past six months.
- Your credit report cannot indicate that you have died. This can sometimes happen if you share an account with someone who has died.
- If you are new to lending or have not reported credit information to credit bureaus in the last six months, you may not have FICO scores.
You can obtain a VantageScore, which considers your payment history, allowing you to build your credit score more quickly as soon as your payments are reported.
If your credit file is reliable enough to generate a credit score, your score will be valid. On the other hand, if you have a bad credit history, you qualify for a score but have previously abused your credit.
No score is better than a bad score
You have a clean slate without a score and must prove that you can handle credit responsibly,” explains Patrick Beckman, financial editor of the Rave Reviews review blog.
“Think of a credit score as trying to make friends with a new person you just met, and a bad one as trying to make friends with someone you let down in the past,” Beckman says.
Baskaran says that overcoming a bad score is harder than no score because lenders have seen your past credit management problems. You must be patient and avoid old bad habits while waiting for the negative points to disappear from your record.
Beckman adds: “When you don’t have credit, expect lenders to show healthy skepticism when you apply for a loan or credit card. In some cases, they may not approve your application.”
How to build a credit score from scratch
The main way to get a good credit score is to use credit responsibly over time. But if you fall into the “no credit score” camp, you may be in a “chicken and egg” situation where you can’t get approved for a loan because you don’t have a credit score.
Never be afraid: you can earn a loan quickly.
Some strategies include:
- Using a shared credit card
- Become an authorized user on someone else’s card
- Сhecking if you can report your rent and other payments to credit bureaus.
How much does a bad credit score cost? Conclusion
Remember that there are no hopeless situations! Your credit score is not permanent and can be affected by various factors. Yes, it may not be easy, but all efforts will pay off in the future. Sign up for a consultation at LBC Mortgage for a comprehensive consultation on your mortgage financing prospects.