The True Cost of Bad Credit

A drop in your credit score means more than paying higher interest rates for loans. Here's how it can mortgage your future and risk your retirement nest egg.

Your credit is critical to your overall financial health for at least three reasons.

First, bad credit means you pay higher interest rates when you borrow money. Second, it can impact other expenses, like your car insurance, because some insurers figure that people who wreck their credit are also more likely to wreck their cars. And, third, it can hurt your ability to find work: Many employers also believe that those who aren’t responsible with their money might not be responsible as employees. That seems to be a matter of opinion.

One way to get a sense of your credit is by looking at your credit score. The company that produces the most-used credit score, the FICO score, is Fair Isaac Corp., which also goes by FICO. You can use FICO’s Free Credit Scores Estimator to get an idea of how various mistakes in your use of credit can affect your score.

Maxed-out card: This mistake costs 10 to 30 points for someone with a 680 FICO score, and 25 to 45 points for someone with a 780.

30-days-late payment: 60 to 80 points, and 90 to 110 points

Debt settlement: 45 to 65 points, and 105 to 125 points

Foreclosure: 85 to 105 points, and 140 to 160 points

Bankruptcy: 130 to 150 points, and 220 to 240 points

The higher your score, the more points you’ll lose due to such mistakes. Keep in mind that a perfect FICO score is 850, and you’ll generally need a score of at least 730 to 760 to get the best possible rates on loans, depending on the lender.

Translating point losses into dollar losses

The most obvious reason to maintain a good credit score is that bad scores mean less access to credit and higher interest rates when you receive credit. Reduced access to credit means lost opportunities for you. Higher interest rates can cost you a ton of money.