Your Credit Score - Part 4: How Does A Low Credit Score Affect My Interest Rates?

Lenders estimate your ability to pay back money based on your credit score. The risk factor they take on is built-in to your interest rate as a financing fee. Therefore, a low credit score results in a higher interest rate, higher monthly fees, and a higher amount of interest being paid over the total life of the loan.

The negative long-term impact of a low credit score cannot be overstated. It will cost you a small to medium sized fortune in extra interest payments over time. For example, on a $250,000 mortgage loan a borrower with a 720 score would generally pay around $601 per month less than a borrower with a 620 credit score. Assuming the loan is paid off over 30 years the borrower with the lower score will pay $216,432 more on the same amount of money financed.

This hypothetical example clearly demonstrates the importance of knowing your credit scores and proactively addressing any derogatory credit issues you may have immediately.

-Bill Burniece