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Bad credit scores can lead to a lifetime of financial headaches

| Wednesday, July 20, 2016, 9:00 p.m.

Most Americans know that a good credit score is essential to the health of their personal finances.

But many may not realize that a bad score can cost them thousands of dollars when it comes to buying a house or car, or opening a credit card account.

On a five-year $20,000 auto loan, for instance, someone with a poor credit score — around 600 — could pay $5,000 more in interest over the life of a loan than a person with a stellar score above 700, according to the Consumer Federation of America, a nonprofit consumer advocacy organization in Washington, D.C.

In a recent survey, the Consumer Federation and VantageScore Solutions found that over 80 percent of Americans knew that 700 was a good score and that mortgage lenders and credit card companies pay attention to scores. But only 22 percent knew how much a bad credit score could cost them on typical loans.

“Of greatest concern to us is that most consumers don't understand how badly they'd be penalized when applying for a loan with a low credit score,” said Stephen Brobeck, the federation's executive director.

“If your score is 700 or above, you're not going to be penalized much, if at all,” he said. “If you're below 600, you definitely will be penalized.”

The Consumer Federation and VantageScore, a credit scoring company based in Stamford, Conn., surveyed 1,005 adult Americans in April.

The survey had a margin of error of plus or minus 3 percentage points.

And poor credit scores hurt consumers in other ways, said Liz Weston, a personal finance columnist for NerdWallet, a financial website based in San Francisco. Bad credit can make it more expensive to rent an apartment and harder to receive a good rate on car insurance, as well as lead to higher deposits for utilities.

Weston said bad credit can cost the average consumer an additional $200,000 over his or her lifetime. “It really does permeate your financial life,” she said.

People with poor credit scores can pay about 1 percent more in interest for a mortgage than someone with good credit, Weston said. While that may not seem like a big difference, when spread out over a 30-year loan, the extra 1 percent can add up to tens of thousands of dollars.

The difference in rates can be even larger when it comes to home equity and auto loans, she said. In some cases, someone with bad credit will pay twice the interest rate as someone with a good score. “Home equity and auto loans are incredibly sensitive to credit scores.”

Given the much higher rates, the Consumer Federation's Brobeck said he recommends that people with low credit scores ask themselves: “Do I really need this loan?”

People should consider buying a less expensive car that they can pay for in cash or with a smaller loan, for example. Or if possible, find a relative to co-sign for a loan.

“Then work really hard to increase your score,” Brobeck said. “Make those payments in full, on time every month.”

One of the most common ways in which consumers hurt their credit is by skipping credit card payments, which can reduce their score by 100 points — the difference between a good score and a bad one.

“If you skip a payment, you are really torpedoing your score,” Weston said.

She recommends reducing credit card balances to less than 30 percent of their limits, which can go a long way toward raising a score. Maxed-out credit cards are a signal to lenders that consumers may be financially stressed and a greater credit risk.

“People underestimate how much their credit card balances are hurting them,” Weston said. “If you consistently max out cards looking for rewards, that hurts you, even if you pay them off every month.”

Alex Nixon is a Tribune-Review staff writer. Reach him at 412-320-7928 or anixon@tribweb.com.

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