First Person: The Financial Cost of Bad Credit

During my divorce years ago, my credit rating took a nose dive down to the 500s. Falling behind on the mortgage payment and credit cards was a huge reason for the dismal score, but so was a $2,000 IRS lien belonging to the ex-husband.

Most people think bad credit only means that it's tougher to get credit. It's really more complicated than that. A bad credit rating means your new credit cards have higher interest rates than your old cards did. It also means that finding a place to rent is harder, landing a job is tougher, and even insurance rates are higher.

For me, bad credit cost me thousands of dollars in additional interest in the three years following my divorce.

Higher interest rate on a car loan. When my car broke down, I hit the car lots for a cheap replacement. The first seven car dealers I visited turned me down flat. The 8th sold me a used Jeep Wagoneer for $10,000 with a 14% APR on a 3-year term. If my credit was better, the interest would have been between 4-6% plus I might have qualified for a cheaper car.

The result of higher interest meant payments of $273.42/mo instead 243.38/mo with the $30 difference all going to interest. Over the course of the loan, that higher rate cost me an additional $1,100 in interest.

Higher interest on a furniture loan. I ran into the same problem when it came to buying a mattress set, and ended up financing this $400 purchase at 24% interest. Over the 12-month term of the loan, I paid $96 in interest. If I had managed to keep my credit cards in the divorce, the interest for the year would have been closer to $30.

High interest on credit cards. Making regular payments on both the car and the mattress improved my credit score enough that I was able to secure a credit card at 19% interest. Pre-divorce my interest rate was 6%, which meant bad credit cost me an extra $130 in interest a year on a $1,000 purchase.

No more free payment terms. Back when I had good credit, our family physician extended free payment terms. Post divorce, payment was demanded at the time of service which meant charging those doctor visits on that 19% credit card. On a $100 visit, I was now paying $6 in interest where none was charged before.

As long as I had my ex-husbands tax lien hanging on my back, my credit would never improve and I would be charged high interest rates. To get out of that situation, the only option was to borrow the money from family (it had climbed to $5,000 by then with penalties and interest) and pay off the debt for good.

Worth it? Absolutely. When my new husband and I financed our home, our stellar credit rating resulted in a 5% interest rate on a first mortgage. Had my credit still been rotten, the interest rate would have been closer to 7% which would have meant higher payments and an extra $42,948 in interest payments alone.

More from this contributor:
Ten Ways to Cut Food Expenses and Increase Your Savings.
How to save money easily without changing your lifestyle.
Consumer tips for avoiding credit card fees.