How My Bad Credit Costs Me Over $100,000

Your credit score is an important number that lenders take into account in order to decide whether or not you are eligible for a credit extension, and on what interest rates and terms you can negotiate new credit. Your credit score is determined by several aspects of your credit history which weigh more or less on your total score. The lower your credit score, the less likely you are to be approved for extended credit and loans.

FICO credit score is determined by:

- Payment History - 35%
- Total Amounts Owed - 30%
- Length of Credit History - 15%
- New Credit - 10%
- Type of Credit in Use - 10%

My Situation in 2005

In 2005, I got:

- $15,000 in private student loan to fund my college education
- Private student loan was still due when I got my first Visa card, of which I carry a balance of $11,000 over the years.
- I bought my first car $15,000 for 5 years on credit
- I bought my first home with a $150,000 mortgage for 30 years

In 2005, I was paying my credit cards bills on time, trying not to max out my credit cards. Lenders would increase my credit limits and would give me more offers of credit. This way, I could spread my credit balances across several cards with different credit limits and protect my credit score. At that time, my FICO credit score was 720, which is good to excellent.

In 2009, lending standards got tighter and since then, banks hardly negotiate low interest rates. My 720 credit score used to get me very good rates, but under the new, tighter credit standards, I needed at least 750 FICO credit score. However, my financial situation changed. I lost my job and I couldn't make timely credit cards payments. I was unemployed for one year. Inevitably, I maxed out my cards, which made lenders averse to give me more offers of credit. My credit balances accumulated, hurting both my credit score and my ability to negotiate lower interest rates. Under my new financial condition, it was impossible to increase my credit score. On the contrary, my FICO credit score was downgraded to 630, which is fair to poor.

How My Bad Credit Costs Me over $100,000

Student Loans

Private student loans have variable interest rates, while federal student loans have fixed rates. When my credit was ruined, I paid a penalty of $6,250 because private student loans - unlike federal student loans - do consider credit scores.

Credit Cards

I paid a penalty of $24,000 for making late payments and maxing out my credit cards.

Car Financing

My car payments skyrocketed because my credit was ruined. While with 720 credit score, I had $0 cost of bad credit, as soon as my FICO credit score was downgraded to 630 I was required to pay $2,135.

Home Mortgage

My bad credit had an impact on my mortgage payments as well. With 630 credit score I was required to pay $68,480 as cost of bad credit.

Bad credit can be really distressing. In total, my bad credit costs me $100,865. If you wonder why some people get drown in debt while others seem to control their finances, it's probably in the way they (or apparently they don't) manage credit.

Sources:

http://www.investorglossary.com/fico-score.htm

http://www.myfico.com/Default.aspx

http://www.buzzle.com/articles/fico-score-managing-your-fico-credit-score.html

http://www.huffingtonpost.com/2009/02/02/banks-arent-budging-on-ti_n_163325.html

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