Have a Low Credit Score? Here’s How Much Extra It Could Cost You

It’s pretty safe to say that America runs on credit. According to the Federal Reserve, the aggregate amount of credit card debt recently surpassed $1 trillion, joining the ranks of auto loans and student loan debt as topping the $1 trillion mark.

America runs on credit

Furthermore, roughly seven in 10 Americans had at least one credit card as of 2015, with the average card-carrying American toting around 3.7 credit cards, according to CreditCards.com. And it’s not just a single generation that’s flocked to credit cards. Two out of every three young millennials (ages 18 to 24) carries a credit card, while roughly three out of four folks in Generation X and the baby boomer generation have a card.

Why the reliance on credit? Part of the answer could be a poor understanding of cash flow and the financial need to lean on credit. After all, Gallup found in 2013 that only 32% of American households kept a detailed monthly budget. There are probably quite a few individuals and families that aren’t managing their money wisely and are thus forced to turn to credit to fuel their consumption.

However, another very probable reason Americans turn to credit cards and other forms of loans is to build up their credit history. While most people are probably aware that a good credit score can help you get a home loan and a decent interest rate, they may be unaware that their credit report can have other impacts on their life. For instance, a future employer can request to see your credit report, as can a prospective landlord, with the quality of your credit history factoring into whether you get the job or home of your dreams. Even utility and insurance companies can check your credit report to determine your deposit (for utilities) or monthly rate (for insurers).

Here’s how much a poor credit score can cost you

As you might have expected, having a low credit score can certainly affect your ability to get a home loan, open a credit card, or receive an attractive interest rate. Just how badly can a poor credit score affect you? Let’s turn to a recent report from ValuePenguin for answers.

ValuePenguin reviewed more than 100 credit cards to determine just how much of a variance consumers with poor creditworthiness dealt with compared with those with high creditworthiness. The results showed that those with poor credit score pay, on average, 80% more to pay off their credit card debt than those with good or excellent credit scores. People with low credit scores may also need up to 26 extra months to pay off their balance relative to good-credit folks, based on a $2,500 starting balance and the assumption that minimum payments are being made.

Within their sampling, ValuePenguin even found instances where those with low credit scores paid double in interest what those with good credit scores paid, as a result of wide ranges in credit card APRs between poor and good credit scores. A prime example used is the JetBlue Card. Assuming a person had $15,000 in debt and made 8% monthly payments, the good-credit customer would pay $2,071 in interest before the debt disappeared, compared with $4,859 in interest for the poor-credit customer.

While there’s no precise formula for determining which credit cards punish those with poor credit scores the most, certain types of credit cards clearly had higher average APR ranges based on ValuePenguin’s analysis. Arguably the most alluring credit card, the cash-back reward card, had the widest variable APR range of 13.24% on the low end and 22.99% on the high end. That’s a 9.75-percentage-point spread, and it could wind up eating those with low credit scores alive if they regularly carry a monthly balance. Student credit cards and airline credit cards also had notoriously high spreads of 8.63 percentage points and 7.37 percentage points, respectively, based on ValuePenguin’s findings. Conversely, travel credit cards offered the smallest spread of just 3.62 percentage points.