If you thought being rejected for a credit card or loan due to a poor credit history is the worst thing that could happen to you, think again. While bad credit can potentially prevent you from being approved for a car loan or mortgage, low scores can also affect your future interest rates, even if you are approved, costing you money in the long run. In the event you have a report that shows you missed payments or have items in collection, creditors might view you as risky, which is likely to increase your interest rates.
Here are ways a low credit score can impact your future interest rates:
Home Loan Rates Are Greater for Poor Credit Scores
When lenders look at your application for approval for a home loan, they will consider a variety of financial factors. As your ability to be approved for a mortgage is dependent on your credit score, your interest rates for your home loan will likely be determined by your history of on-time payments, balancing different types of credit and more.
The higher the credit score, the lower your interest rates will likely to be, meaning fewer monthly mortgage payments. Douglas Benner, a senior loan officer with Embrace Home Loans, told Bank Rate that borrowers who have a score ranging in the mid-600s might pay 0.75 percent higher interest rates than the lowest rates.
While it might not seem like a huge amount now, even a half or one percent higher on an interest rate of your mortgage can pile up and could impact the affordability of your future home. If you have a good credit score that allows you to be approved for an interest rate of 4 percent for a home worth $300,000, you might pay $2,044 per month for the principal, taxes and home insurance. Having a lower score that ups your interest rate to 5 percent, increases your payments to $2,222 per month.
Larger Chance of Paying Too Much for Car Loans
Although you might be excited to finally buy a new car, you might be discouraged when shopping for a car loan. It's important to check your credit history requesting a report from one of the three main credit reporting bureaus before seeking out a loan for a car. Not only will seeing your credit score give you a more accurate picture of your ability to be approved for a new line of credit, you might also be able to gain more insight into what is a good deal for a car loan to avoid overpaying in the long haul. By carefully checking your credit score, you will ensure you will be able to make manageable payments for your vehicle.
Credit Cards Might Be Higher Interest
As with the other loan types discussed above, creditors will view you as more of a risk and provide a higher interest card. A bigger interest rate could result in you accumulating more credit card debt or potentially being considered delinquent with payments, lowering your credit score even further.
If you are approved for a credit card with a low score and have a card that has a high monthly interest rate, there is a chance to lower your rates. Credit card companies will pay attention to your credit history and you might be able to negotiate a lower interest rate if you maintain good spending habits. You might also want to consider looking into fixing any errors on your existing credit report to ensure you get the best interest rate for your next loan or credit card.