Lesson 3

The True Cost of a Credit Score

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In this video we show you real life examples of how a bad credit score can cost you tons of $$$

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In the next video we'll explain exactly what a credit score is and how it's used
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The True Cost of a Credit Score by Credit Virgin

In this video we’ll apply interest to real life situations and see why it’s such a big deal to have a good credit score. John just graduated from college and he wants to buy a car. This new car will cost him $20,000. Since he just graduated he doesn’t have that kind of money just lying around. So he’ll need to take out a loan to help pay for the car. If he has a good credit score, he’ll probably get a low interest rate around 3%. Let’s assume he takes out a 6 year loan. This means that over the life of the loan he’ll pay $1,879 in interest. Plus the $20,000 they loaned him for the car. This will bring his total to 21,879.

Now let’s say he has a bad credit score or he doesn’t have one at all. They might be willing to give him a loan, but if they do they’ll charge him a high interest rate because they don’t know for sure that he’ll pay them back. We’ll pretend he’s buying the same car with the same loan except they are charging him a 12% interest rate. This mean he will pay $8,152 in interest, which brings his total to $28,152. He’ll pay an extra $6,273 just because of his credit score. That’s a lot of money, but it’s an even bigger deal if he wants to buy a house.

Let’s say John want to buy a $150,000 house. He will most likely take a out a 30 year mortgage. We’re going to look at how much of a difference an interest rate can make on his payments, bUT first let’s see how they determine his interest rate. Depending on his credit score he will get put into a bucket that determines his interest rate, so the best credit scores go into the bucket with the best interest rate. All the credit scores between 760-850 go in the first bucket, all the scores between 700-759 go in the second bucket and so-on and so-on.

John wants to be in the first bucket because it will save him a ton of money when he goes to buy a house. This chart will help to depict the savings. If John’s credit score put him in the first bucket he’ll be charged 3.2% interest on your 30 year mortgage. This means that over the life of the loan he will be paying $83,532 which is actually pretty good! However, your total interest paid drastically increases with only a slight change in interest rate, but what if your credit score lands you in the last bucket? You’ll be paying 4.9% interest rate, which means you’ll have to pay $136,592 over the life of the loan! Just by starting to build credit while in college, you could save over $53,000 on your first house!!!

What if you’re not planning to buy a house, or a car when you get out of college? Is your credit score still import? Of course!!! For college students like John it more important than ever! Many employers now run a credit check before hiring you. A good credit score indicates that you are a responsible person and a bad credit indicates just the opposite. It will make it a lot harder to get hired if you have a bad credit score. If you’re focused on building a good resume, you should also be focused on building a good credit score. There are many other reason’s a good credit score is important such as saving money on student loans and car insurance. If I keep going about the benefits of good credit, we could be here all day. So, we’ll move on. In the next video you’ll learn exactly what a credit score is and where it comes from.

About Credit Virgin

Credit Virgin was created for students by students. Our goal is to teach students the importance of building good credit through content that is educational, unconventional, and entertaining

© 2012 Credit Virgin


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