Credit 101: Part 5 – The Dollar Cost of Your Credit Score

Interest Image

Understanding the Real Cost of Your Credit Score

Today, every financial institution charges interest to borrowers as a return for lending money.  The amount you borrow (the principal) + interest + length of your loan (term) = your total cost of credit.

Let’s assume two people borrow $20,000 for five years (60 months) to purchase a vehicle.  Borrower #1 has a high credit score, allowing them to have a lower interest rate.  Borrower #2 has a lower credit score, which will make their interest rate much higher:

  1. At 2.9% interest, the first borrower will pay a total of $21,509.62 for this vehicle by the end of the loan.
  2. At 14.9% interest, the second borrower will pay a total of $28,487.49 for this vehicle by the end of the loan.

Based on this example, you can see that not taking care of your credit comes at a large cost.  By simply taking care of your credit you would save nearly $7,000!!

Continue Reading…