Every day, we discuss all things credit. The state of your credit reports, your debt, your credit scores, paying bills on time, keeping your balances low, not closing old accounts, etc….
Why spend so much time focusing on your credit?
Why is credit important for me?
Surprisingly enough, these are actually very common questions. So lets take a break from discussing how to fix credit, and go over the importance of credit.
Let’s not play coy, the obvious answer here is MONEY. Better credit means you pay less to borrow money. You pay less on auto loans, mortgages, credit cards, personal loans, even insurance premiums.
How much money are we talking about?
Let’s take a look at the Steve and Dan example.
- Steve has a credit score of 560
- Dan has a credit score of 760.
Steve and Dan go out and buy;
- A house ($250,000 for 30 years)
- A car ($35,000 for 5 years)
So how does credit impact Steve and Dan’s finances?
- Steve – 560 Credit Score
- $1,663 /month Mortgage
- $966 /month Auto Loan
- TOTAL: $2,629 /month
- Dan – 760 Credit Score
- $1,157 /month Mortgage
- $584 /month Auto Loan
- TOTAL: $1,740 /month
Looks pretty straight forward.
Steve pays $888 a month more because of his bad credit score.
But wait, there’s more.
Calculated over the lifetime of the loans;
- Steve pays out a total of $656,640
- Dan pays out a total of $451,560
Steve pays $205,080 more than Dan!
So lets go back to our original question. Why is credit important for you? $205,080!
NOTE: We were probably a little gracious with Steve. Let’s be honest, at a 560 credit score, he probably wouldn’t have been approved for the mortgage and would still be stuck paying rent.
And odds are, no one would have financed a $35,000 car to Steve, he probably would have settled for a $10,000 automobile at a much higher interest rate.
Steve would have to pay more for auto insurance, homeowners insurance/renters insurance, life insurance, health insurance.
Steve would also have a lot more trouble finding a good job because employers check job applicant’s credit reports.
The sad reality is that people with Good Credit get Richer, and those with Bad Credit get Poorer.