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How Bad Credit Costs You

A poor credit rating can impact your finances, job search and more

spinner image debt challenge empty coin purse Bad Credit Costs More Money

If the recession has taught us anything, it's that people of all ages are sorely lacking in basic financial literacy skills.

Now a new study, called Americans' Financial Capability, highlights how adults in the U.S. are especially ignorant about matters concerning credit and debt.

See also: Dispute mistakes on your credit report.

The National Bureau of Economic Research, which issued the study, found, among other things, that many people mishandle credit cards and debt to such a great extent that higher interest payments and fees routinely penalize them.

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Case in point: Some of the 1,500 Americans polled by the Bureau didn't even know the interest rates they pay on their credit cards or mortgages. Others made late payments on credit accounts and suffered consequences such as late fees, penalty or "default" interest rates, and ruined credit records.

It's one thing to be a novice when it comes to sophisticated investing strategies, complex tax laws or arcane estate planning rules. Those areas frequently require detailed financial knowledge or specialty advice from an educated, experienced professional.

But mastering your credit doesn't require an MBA. On the contrary, it's an area that each of us can conquer with a bit of time, effort and study. If you're not willing to educate yourself about credit issues, that's like throwing money down the drain. After all, it's careless to be clueless about your credit rating, because bad credit can cost you money — lots of it.

A Million Dollar Credit Rating

In my book, Perfect Credit, I calculated that an individual with terrific credit would save or earn over his or her lifetime $1 million more than someone with bad credit.

How is this possible?

It all boils down to all the financial transactions you'll likely make over a lifetime, as well as the areas of your life where your credit rating plays a crucial role.

Let's start with the loans and credit you'll apply for.

Think about the credit cards, mortgages, business loans, auto loans or student loans for which you've applied or might co-sign for in future years.

When you have bad credit, you'll have to pay an exorbitant amount of money in interest and finances charges — that is, if you get approved for a loan at all.

As of July 2011, for example, a person with a FICO credit score of 760 or higher who qualifies for a $300,000 mortgage can expect to get that loan at a rate of 4.3 percent. This borrower's monthly payment will be $1,485, according to data from

Now contrast that with someone who has shaky credit and a 620 FICO score. This individual will only qualify for a $300,000 mortgage at an interest rate of 5.9 percent. That translates into a $1,779 monthly payment. Each year, the second borrower will fork over an extra $3,528 to the bank. And over the life of a 30-year loan, the person with bad credit will shell out $106,126 more in interest alone.

Make the same calculations for all other credit obligations you might take on, and it's easy to see that bad credit can cost you dearly when you need to secure a loan or credit.

Excellent Credit Helps You Save or Earn Money

In other areas, too, having bad credit can cost you a fortune, namely because it can impact your ability to save and earn money.

Did you know your life and auto insurance rates are tied to your credit rating? It's true. People with excellent credit are offered lower insurance rates than those with poor credit. It may not seem fair, but that's how the system works.

On the job front as well, having a bad credit profile spells financial trouble.

For starters, employers are increasingly pulling people's credit reports before determining whom to hire and whom to promote. According to the Society for Human Resources Management, 60 percent of all U.S. employers now conduct credit checks as part of the employment screening process.

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In a worst-case scenario, bad credit can prevent you from landing a lucrative job, or getting a promotion that you deserve.

For all these reasons and more, it's critically important to manage your credit wisely and to control your debts. The debt you're carrying — particularly credit card debt — is inextricably linked to your credit rating. After all, your three-digit credit score is designed to tell a lender how likely you are to repay a loan.

So take time to do whatever is necessary to stay on top of your credit. Be sure to:

  • check your credit reports at least once a year
  • dispute mistakes in your credit files
  • pay down credit card balances to boost your credit rating
  • apply for credit only when you truly need it.

Above all, experts say you must pay your debts on time, preferably making more than minimum payments, because those payments primarily just go toward interest charges.

"To pay off your debt in a financially prudent way, you have to pay more
than the minimum payment," says Bill Hardekopf, CEO of
and author of The Credit Card Guidebook. "You pay more money toward
your debt, and save money on your interest payments. With any incremental money you receive or save, use it to immediately pay down your credit card debt. Make micropayments to help pay off as much of your debt as soon as

Again, ridding yourself of debt and strengthening your credit rating isn't rocket science. You'll have to get back to financial basics, and pay close attention to the ways in which credit impacts your life. It's worth the time and the money you'll save.

Lynnette Khalfani-Cox, The Money Coach®, is a personal finance expert, television and radio personality, and a regular contributor to AARP. You can follow her on Twitter and on Facebook.