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Solstock | E+ | Getty Images<\/p>\n<\/div>\n<\/div>\n<\/div>\n
Having a low<\/a> credit score<\/a> can come at a significant cost, according to recent data.<\/p>\n Americans with a credit score of 620 or below pay about $3,400 per year for essential financial products in what Bankrate, in a\u00a0new report<\/a>,\u00a0calls a “subprime tax.”<\/p>\n The “subprime tax” comes in the form of higher interest rates<\/a> on products such as mortgages, credit cards, auto and personal loans, and pricier premiums on auto and home insurance.<\/p>\n Borrowers with a score of 620 pay, on average, $1,330 more annually in mortgage loan interest than those with credit scores of 700, Bankrate found. Compared with that group, subprime borrowers also pay $745 more annually in auto loan interest, $514 more in auto insurance premiums, $398 more in home insurance premiums, $328 more in personal loan interest, and $89 more in credit card interest.<\/p>\n If a borrower doesn’t improve their score, the subprime tax can snowball over the long run, Bankrate found. Over five years, Bankrate’s report said, the subprime tax can cost about $17,016, and over 30 years, the cost is roughly $102,094.<\/p>\n More from Personal Finance:<\/strong> Bankrate said the insurance premium and debt calculations were based on national average data from Bankrate, Experian and FICO. Bankrate defined a score of 620 and lower as subprime, and a score of 700 and higher as prime.<\/p>\n The subprime tax affects roughly 21% of American adults, Bankrate estimated.<\/p>\n As of April, the average FICO credit score<\/a> in the U.S. is 715. The score ranges from 300 to 850; the higher the credit score, the better.<\/p>\n The Bankrate report showcases the value of having a good credit score: A good score increases your likelihood of being approved for loans and of receiving better financing terms, experts say.<\/p>\n However, “you don’t need a perfect credit score to get the best loan terms,” said Ted Rossman, a senior industry analyst at Bankrate.<\/p>\n “Generally speaking, lenders stop distinguishing once you hit the mid-700s and above,” he said.<\/p>\n<\/div>\n Your credit score is a “prediction of your credit behavior, such as how likely you are to pay a loan back on time, based on information from your credit reports,” according<\/a> to the Consumer Financial Protection Bureau.<\/p>\n “It’s like a standardized test score,” said Rossman.\u00a0<\/p>\n If your credit score is low, lenders may think you are more likely to pay late, said John Ulzheimer, a consumer credit expert. To offset that risk, banks and lenders typically charge the borrower higher interest rates.<\/p>\n<\/div>\n Lenders have different definitions of what makes a good credit score, Ulzheimer said.<\/p>\n Even so, experts say, once your score gets to a certain point, or somewhere in the mid-700s, you are generally in a good place in terms of risk.<\/p>\n “The odds of you going delinquent at some point are so low that the lender is happy with taking the risk with you,” Ulzheimer said.<\/p>\n To improve your credit, first take a look at your credit reports<\/a>, issued by the three credit reporting bureaus: Experian, TransUnion and Equifax. You can request them for free via annualcreditreport.com<\/a>. Your credit scores are based on the information in those reports.<\/p>\n<\/div>\n Make sure the information in each of the reports is correct, said Matt Schulz, chief credit analyst at LendingTree. If there’s a mistake, which can happen, correcting it can help improve your credit.<\/p>\n Otherwise, the “most actionable way” to improve your score is by working toward paying down any credit card debt, said Ulzheimer.\u00a0<\/p>\n “If you can pay down or pay off credit card debt, your scores are going to improve,” he said.<\/p>\n Reducing your debt can improve your credit <\/a>utilization<\/a> ratio<\/a>, or how much you owe relative to how much credit you have available to you.<\/p>\n This factor makes up 30% of your score, according<\/a> to FICO. Experts typically advise keeping your credit utilization under 30%, but a 2024 LendingTree study<\/a> found that consumers with the best scores had utilization ratios of around 10%.<\/p>\n Another easy way to boost your score is by making on-time payments. Payment history makes up 35% of your score<\/a>, according to FICO.<\/p>\n As you increase your credit score, look for ways to benefit. For example, ask your credit card issuers if you can qualify for a lower rate<\/a>, and see if your insurers will reassess your policy premiums. Gauge whether it’s worth refinancing<\/a> any current loans.<\/p>\n<\/div>\n<\/div>\n\n
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What private assets in 401(k) plans mean for investors<\/a><\/p>\nWhy a low credit score can cost you<\/h2>\n
How to improve your credit<\/h2>\n
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