Credit scores range from 300 to 850 under the most widely used FICO® Score system. Good credit starts at 670, and there are quite a few benefits that come with it. For example, your credit could help you qualify for the best credit cards with the most valuable features.
A score below 580 falls into the bad credit range. This is often where people end up if they’ve had previous credit issues, such as missed payments. When you have a low credit score, there are several ways it can cost you money.
1. You pay higher interest rates on loans
Just about every lender checks your credit score when you apply for a loan. If you have bad credit, lenders see you as a greater risk. They’ll charge you a higher interest rate, which can make a massive difference in the cost of your loan.
Let’s say you’re buying a new car with a 60-month auto loan for $40,000. Your credit score is below 580. A typical APR would be 17.795%, according to FICO’s loan savings calculator. You’d be looking at a monthly payment of $1,011 and total interest charges of $20,677 over the life of the loan.
If you have a credit score of 720 or higher, a typical APR right now would be 7.461%. That would bring your monthly payment down to $801 and the total interest down to $8,047. Overall, a higher credit score would save you $210 per month and $12,630 in total.
2. You could be charged more for home and auto insurance
Most states allow insurance companies to use your credit score when setting your premiums. Studies have found that people with lower scores make more claims, on average, so insurers charge them more.
For example, the average driver paid a total of $3,017 for auto insurance in 2023, according to research by The Motley Fool Ascent. The average driver with poor credit paid $4,145. Their credit cost them over $1,100.
Drivers with excellent credit, on the other hand, scored some serious savings. They paid $1,947 for auto insurance, saving $1,000 compared to drivers overall and paying less than half as much as drivers with poor credit.
3. You’ll have to settle for credit cards with fewer perks
With bad credit, your credit card options are limited. You can still get credit cards, since many card issuers offer credit cards specifically for people who need to rebuild their credit.
The most common option in this situation is secured credit cards, which are cards that require a refundable security deposit to open. You may need to put down $200 upfront to get a card. You can get that back later, either by closing the card or graduating to an unsecured card. But it’s still a cost you wouldn’t have with a high credit score.
Credit cards for bad credit also usually don’t have many perks, so you miss out on a lot of value. For example, with some of the top cash back cards, you can earn 2% on all your purchases. If you spend $30,000 on your credit card in a year, that’s $600 in cash back. Cards you can get with a low credit score may not earn anything back on your spending.
4. You could pay a larger security deposit when renting a home
Finding a home is harder with bad credit, whether you’re buying or renting. If you’re buying, you’ll have fewer mortgage options with bad credit, and you’ll pay a higher mortgage rate.
If you’re renting, you could have trouble getting approved for a lease. Most property management companies and landlords will check your credit when you apply. They may reject your application if you have bad credit. Or, they could require you to pay more for your security deposit, since you’re considered a higher risk.
How to fix bad credit
Bad credit is frustrating because of all the ways it affects your life, but you don’t need to deal with it forever. Here’s what you can do to repair your credit:
- Make payments on delinquent accounts to get caught up. If you’re having trouble, call the creditor and ask about setting up a payment plan.
- Pull your credit report (you can do this for free at AnnualCreditReport.com) and dispute any errors you find.
- Work on paying down credit card debt. Put any extra money you have toward it to save on interest charges and improve your credit score.
- Pay credit cards and loans on time every month.
- Use a free credit monitoring service online to track your credit score and for recommendations on how to improve it. Many credit card companies offer these services for their cardholders.
If you follow those tips, you could be surprised by how quickly your credit score improves. While everyone’s situation is different, most start seeing progress within six months to a year.