A Low Credit Score Could Cost You Nearly $400 in Interest Each Year
You should avoid carrying a credit card balance whenever possible. But if you do, make sure you’re not paying more than necessary. Many banks use credit scores to assess lending risk, meaning the lower your credit score, the more you could pay in interest.
According to Consumer Financial Protection Bureau (CFPB) data, those with superprime and prime plus credit scores (720 or above) receive an average APR of 23.1%, which is 5.9% lower than those with subprime scores (580-619), who are charged an average APR of 29%.
While 5.9% might not seem like a big difference, credit card debt can often take months, if not years, to fully pay off. So, how much could a poor credit score be costing you?
CNBC Select takes a look at how much extra you could pay in interest with a lower score (based on the average U.S. credit card balance), plus some practical ways to improve your score.
Why credit scores affect your interest rate
Your credit score greatly affects how much you’ll pay for various financial services. It may not directly impact the upfront cost, but you’re likely to encounter lower approval rates and higher interest, which can result in you paying much more over time.
Many financial institutions will use your credit score to get an approximation of how likely you are to pay back your debts; the higher your credit score, the more likely you are to pay back your debts, meaning you’re less risky for banks. On the flip side, a lower score signals to lenders that you’re more likely to default. Banks may charge you more due to the risk they’re taking on.
With credit cards, this is even more common, as many cards are unsecured debt (unless you have a secured credit card that requires an upfront deposit). If you default on an auto loan or your mortgage, there’s a car or home as collateral. For credit cards, this often isn’t the case, which is one of the reasons their APRs tend to be higher.
How much does a bad credit score cost?
Using the average interest rates for both superprime and subprime customers (23.1% and 29%, respectively), we can estimate just how much your credit score could be costing you each month. In this example, we’ll make $250 monthly payments and show updates on principal and interest every six months:
Superprime vs. Subprime Interest Comparison
| Time frame | Payments made to date ($250 per month) |
Remaining balance @ 23.1% APR | Remaining balance @ 29% APR | Extra interest paid at 29% |
| Start | $0 | $6,715 | $6,715 | $0 |
| 6 months | $1,500 | $5,954 | $6,155 | $201 |
| 12 months | $3,000 | $5,102 | $5,510 | $408 |
| 18 months | $4,500 | $4,146 | $4,765 | $618 |
| 24 months | $6,000 | $3,075 | $3,906 | $830 |
| 30 months | $7,500 | $1,872 | $2,918 | $1,046 |
| 36 months | $9,000 | $502 | $1,776 | $1,274 |
| 39 months (23.1% card paid off) | $9,543 total | $0 | $1,200 | $1,350 |
| 44 months (29% card paid off) | $10,964 total | $0 | $0 | $1,421 total |
To fully pay off their credit card debt, subprime borrowers will take five months longer than superprime borrowers (44 months vs. 39 months, respectively) and pay an additional $1,421 in interest. That works out to nearly $400 extra per year.
A subprime borrower will have paid a total of $4,249 in interest payments alone, over half of their total starting debt, compared to the $2,828 in interest paid by superprime borrowers.
3 ways to boost your credit score
While your best bet for consistent credit score growth is sticking to solid financial habits (like paying your bills on time and in full), there are some additional ways to help.
Consider credit repair
Credit repair companies contact the three main credit bureaus, Equifax, Experian and TransUnion, and attempt to have inaccurate or outdated negative marks removed from your credit reports. This also extends to banks and debt collectors, for example.
While you can technically repair your credit yourself, you may not want to; the process can be very time-consuming and, at times, rather confusing.
If you’re looking for a credit repair company that offers a money-back guarantee, consider Credit Saint, which offers a free consultation for new customers. If no negative marks are removed from your credit report within 90 days, you can qualify for your money back.
Credit Saint Credit Restoration
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Cost
First work fee: $195 for clean slate package, or $99 for credit remodel and credit polish packages
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Monthly fee: $139.99 for clean slate package, $109.99 for credit remodel package, $79.99 for credit polish package
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Highlights
Credit Saint offers three packages for credit repair services and a 90-day money-back guarantee for services. It has received an A rating and is accredited by the Better Business Bureau.
Pros
- Money-back guarantee available if no negative items have been removed after 90 days
- High customer ratings
- Online chat feature
Cons
- Not available in South Carolina, Kansas, Mississippi, Oregon, Maine or Washington, D.C.
- Must pay for the highest tier package for unlimited disputes with credit bureaus
- Higher first work and monthly fees than other companies
Pay down outstanding debt
Since payment history makes up 35% of your credit score, paying down your revolving credit balances can make a substantial difference. Not only does making on-time payments help, but you’re also lowering your credit utilization. This is the amount of your total available credit you’re currently using, and it makes up another 30% of your credit score.
One way to help make sure you stick to your payment schedule is to try a budgeting app. These apps can help you organize your finances in a way that makes sense to you, and many of them feature tools for paying down debt, such as tracking it, setting aside additional payments and setting reminders.
If you’re still on the fence, Goodbudget can be a great place to start. The app uses virtual envelope budgeting to set aside funds and offers both a free and paid experience for $10 per month ($80 per year).
Goodbudget
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Cost
Free for 20 total envelopes; $10/month (or $80/year) for unlimited envelopes
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Standout features
Allows couples to use the envelope system digitally for budgeting, and allows couples to track their debt
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Categorizes your expenses
Yes, but users must manually input transactions since the app does not sync to your bank account
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Links to accounts
No, users must manually input purchases and transactions
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Availability
Offered in both the App Store (for iOS) and on Google Play (for Android) and as a version for laptops
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Security features
Information is using bank-grade 256-bit SSL
Pros
- Free version of the app available
- Ability to share budget and spending with your partner
- Digital envelopes help couples save for big goals that matter to them
- Money management courses and resources available
Cons
- Transactions must be entered manually
Using a 0% APR credit card is another option for paying down credit card debt while avoiding interest payments for a specific period of time. The recently reintroduced Chase Slate® Credit Card offers a 0% intro APR period for 21 months on purchases and balance transfers, after which a variable APR of 18.24% to 28.24% will apply. This gives you 21 months during which your debt doesn’t accrue interest, so anything you pay goes directly to the principal.
Chase Slate®
Pros
- Long intro APR for purchases and balance transfers
- No annual fee
- Basic shopping protections
Cons
- No rewards
- Has a foreign transaction fee
Get credit for monthly bills
Since your credit score only reflects information the credit bureaus receive, there’s likely some payments you’re making that aren’t being accounted for. There are a few tools available to help report various types of bills that typically aren’t tracked in your credit score. This includes expenses like utilities, phone bills, rent payments and more.
Experian Boost®
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Cost
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Average credit score increase
13 points, though results vary
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Credit report affected
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Credit scoring model used
Results will vary. See website for details.
FAQs
What is a good APR for a credit score?
What is considered a “good” APR will likely vary depending on your finances. The average credit card APR on accounts assessed interest is 22.30%, according to the Federal Reserve, so any APR around or below this marker is ideal.
What APR would a 700 credit score get you?
Since your APR is calculated by more than just your credit score, it will likely vary. Based on the CFPB data highlighted earlier, the average APR for that range would be 23.1%.
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