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.