How higher interest rates can add up
Because people with lower credit scores are considered higher risks, they are usually charged higher interest rates — if they can get credit at all. Over time, these increased interest rates can make a huge difference in how much you end up paying. As an example, let's look at what happens to three different people with varying credit scores who each take out a $200,000, 30-year home mortgage. (Interest rates are for comparison purposes only.)
| MAGGIE has excellent credit and is able to get a 6 percent, fixed rate mortgage. | CARLOS has an okay credit score and is able to get an 8 percent, fixed rate mortgage. | FRANK has only a fair credit score and is able to get a 9 percent, fixed rate mortgage. |
|---|---|---|
| Principal paid: $200,000 | Principal paid: $200,000 | Principal paid: $200,000 |
| Interest paid: $231,676 | Interest paid: $328,310 | Interest paid: $379,328 |
| Total: $431,676 | Total: $528,310 | Total: $579,328 |
| Difference from 6%: $96,634 | Difference from 6%: $147,652 |