We know that the better our credit, they more we can qualify to buy on credit. However, fluctuations in your credit score can cause your best interest rates to change dramatically.
On a credit card, it is easy to see. When you miss a payment or accumulate too much debt, your credit card issuer can increase your interest rate. When it increases to the default rate, your finance charges can double or go even higher. You notice this because of the higher minimum payment.
Credit Cards
One example is a credit card with a 10000 balance. Assume you have a 9% interest rate. Your finance charges would be $75 each month. You would likely see a minimum payment of about $174 with about $99 going toward the principal balance. If you make a late payment on that account, you could see your interest rate skyrocket to the default rate listed in your credit card agreement.
If your default rate is 24%, then you would see your minimum payment nearly double to $298. Your finance charges alone would be $200, with just about the same amount of $98 going toward the principal balance. The scary thing is that some credit cards have default rates as high as 32%.
Even if you are never late on the account, your credit card issuer likely can still raise your rate to the default rate if they deem that you are a higher credit risk. They check your credit report regularly to monitor your financial situation. If they can justify a higher rate, then they can invoke the universal default clause in your agreement and raise your interest rate.
Vehicle Purchases
Your bad credit doesn't stop with credit cards. Your home and car purchases are affected in a huge way also. Many people with poor credit pay over 20% on a car loan. For a $20,000 car, you would pay a total of $31,792. If you had good credit, you might get a much lower rate of around 6% or less. This could change your total payout to $23,199. Imagine what you could do with an extra $8593.
It's not just the interest either. You also make higher minimum payments. You can pay $530 a month with poor credit or $387 with good credit for the same car.
If you have bad credit, avoid making major purchases. You should concentrate on reducing debt and establishing an on-time payment history. In cases of high credit card balances, you could really benefit from meeting with a credit counselor. Making a change today can help save you thousands later on.
Kenneth Long began his public service with nonprofit organizations in 2001. He has since conducted workshops teaching other nonprofit executives how to integrate credit counseling with volunteer tax preparation programs. Long is a graduate of the University of North Carolina at Chapel Hill and received his Certificate in Nonprofit Management from Duke University.
You may find more information on the relationship between improved credit and interest rates through Personal Financial Network.
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