Does a poor credit score really matter?

 

Yes.  The answer is unequivocally yes!  In fact, sometimes all it takes is a single missed payment to knock more than 100 points off your credit score and label you as a  “high-risk” borrower. Your credit score is a significant factor in determining  what an individual or entity will pay for a mortgage, auto loan, credit cards, and insurance.

For example, let’s examine how to different FICO score may affect two friends; Jim who has an excellent  750 and Carol with a poor 650:

Auto Loans ($25,000 for a 5 year term)

 

 

Jim

Carol

Credit Score

750

650

Interest Rates

6%

10%

Monthly Payments

$483

$531

Total Interest Per Loan

$3,999

$6,870

Total Payment Interest & Principal

$28,999

$31,870

Carol’s Penalty

 

$2,871

Under the above example, Jim’s excellent 750 credit score afforded him a low 6% interest rate,however, Carol’s poor 650 credit score made her a greater risk and therefore the lender offered her a 10% interest rate.The mere 4% difference in the interest rate forced Carol to pay an additional $2,871 over Jim.

Mortgage ($350,000 as a 30-year fixed loan)

 

 

Jim

Carol

Credit Score

750

650

Interest Rates

5%

9%

Monthly Payments

$1,879

$2,816

Total Interest Per Loan

$326,395

$663,824

Total Payment Interest & Principal

$676,395

$1,013,824

Carol’s Penalty

 

$337,429

Under the above example, Jim’s excellent 750 credit score afforded him  a low 5% interest rate,

however, Carol’s poor 650 credit score made her a greater risk and therefore the lender offered her a 9%

interest rate. The mere 4% difference in the interest rate forced Carol to pay an additional $337,429 over Jim.