A credit score isn’t a measure of how successful a person is or how trustworthy a person is at the given moment. A credit score is nothing more than a record of one’s ability to handle debt calculated by a formula and any entity that loans you money has the obligation to take an interest in your score.
Why Bad Credit is More Expensive Than You’d Imagine
It isn’t considered as safe to loan money to someone who has a record of missing payments.
It can be a slippery slope from the first swipe of the plastic to the first bill not paid in full to the burden of crushing debt and sky-high interest rates. That’s why it’s important to exercise caution and use credit responsibly. When thinking of someone with a low credit score we imagine making minimum payments, let’s examine the math and see if minimum payments are a “healthy” way to clear your credit card debt. We’ll let you be the judge of how practical this method is.
What’s especially frustrating is that if a budget is followed and an emergency fund is in place there would be no reason to run a balance and pay high interest on credit card debt yet many make minimum payments each month.
How it affects a person daily
It’s common knowledge among those who’ve financed a vehicle that the best interest rates are most often reserved for those who have the best credit score. A good rule of thumb is that for taking on a greater risk, the loaner will require a greater reward, i.e., higher interest. In addition to making more interest for taking on additional risk, loaners are also in a rush to have their funds returned in riskier situations such as these. Having the loan paid back faster helps negate risk for the loaner. Therefore, many lenders give themselves added security by charging a higher interest rate. So remember, not only does someone who carries a credit card balance pay high interest on their balance, they also likely pay higher interest at the dealership when financing a vehicle.
Houses can have an even larger financial effect and pose as an even greater hurdle for those with poor credit. The same principles described earlier also apply to mortgages. A slightly higher interest rate can really add up over the course of a mortgage especially depending on how expensive the home is. Having good a good credit score can help secure a better interest rate.
If you tally up the damage it becomes obvious that not just bad credit, but non optimal credit can hold someone back from experiencing financial freedom to the fullest.
Read this article about growing your credit score
Michael G. Romanello is a registered representative of and offers Securities through Independence Capital Company Inc. Member FINRA/SIPC. 5579 Pearl Road, Suit 100 Cleveland, OH 44129
Investment Advisory Services offered through Independence Capital Company Inc.