5 Monthly Bills That Vary Based on Your Credit Behavior

By Dan Rafter on 31 July 2017 0 comments

Your credit score is one of the most important numbers in your financial life. Because it incorporates data about your past behavior with credit — how much credit and debt you have and how good you are at paying those bills off — it's deemed as a good predictor of how you'll behave with future bills.

A low credit score can hurt you in many ways: It makes it more difficult to qualify for mortgages, car loans, or credit cards. And when you do qualify for a loan or credit card, you'll be stuck with higher interest rates and the higher monthly payments that come with them. Poor credit behavior can also cost you money each month in the form of higher student loan and insurance payments. (See also: 15 Surprising Ways Bad Credit Can Hurt You)

Most lenders today still consider a credit score of 740 or higher to be a strong one. Anything at 640 or lower, though, is considered weak.

Here's a look at five monthly bills that you'll pay more for if your credit score is low.

1. Mortgage payment

Your credit score has a big impact on your mortgage payment. If your score is high, odds are good that you'll qualify for a lower interest rate, which will, in turn, lower your monthly mortgage payment. If your score is low, the opposite will happen.

Here's an example of the difference that a high or low interest rate can have on your monthly mortgage payment: If you take out a 30-year, fixed-rate mortgage loan of $200,000 at an interest rate of 3.80 percent, you'll have a monthly payment of about $931, not counting what you might pay for homeowners insurance and property taxes.

If you take out that same loan with a higher interest rate of 4.80 percent — which you may have gotten due to a low credit score — your monthly payment, again not counting taxes and insurance, will be about $1,049. That's $118 more a month, or about $1,416 a year. (See also: 4 Smart Ways to Lower Your Monthly Mortgage Payment)

2. Auto loans

You'll face the same situation when applying for an auto loan with a lower credit score. Auto lenders, like mortgage lenders, rely heavily on your credit score. If they see a low score, they'll protect themselves financially by charging you a higher interest rate. This higher rate will result in a higher monthly payment.

The higher rates make sense if you look at your loan from your lender's point of view. A lower credit score means you have a history of making bad financial choices, whether that means paying bills late or missing them entirely. Lenders then levy a higher interest rate to make up for the danger of lending to riskier borrowers.

3. Credit cards

Interest rates on credit cards can be high — 20 percent or higher in some cases. But if your credit score is high, you'll increase your chances of qualifying for a lower rate on your cards. This is important: If you carry a balance on your cards each month, a lower interest rate will mean a lower required minimum monthly payment. It also means your debt will grow at a slower rate.

How you use credit cards has a big impact on your credit score. If you always pay your cards on time, and if you don't run up too much debt on them, you will steadily boost your score. (See also: How to Pay Less Interest on Your Credit Card Debt)

4. Student loans

There are two types of student loans: federal and private. Your credit score won't affect your interest rate on federal loans. But lenders originating private student loans will look at your credit score. If your score is low, they'll charge you higher interest rates and fees. This will result in a higher monthly student loan payment.

5. Homeowners insurance

Insurance companies don't rely on your credit score to set your homeowners insurance rates. They do, however, use a similar metric known as an insurance score. This score includes information about your past payment history, your debts, and your number of open credit accounts, just like your credit score. It can also include information about any safety features — such as fire alarms and security systems — protecting your home and whether you've made a high number of insurance claims in the past.

If your insurance score is high, you'll qualify for a lower insurance bill. If that score is low, you can expect to pay more for your homeowners insurance.

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5 Monthly Bills That Vary Based on Your Credit Behavior

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