It’s no secret that not having a great credit history can be costly. But, even if they do get a loan, most people don’t realize how much more they’ll pay based on their poor credit past, warns Geoff Williams, the author of Living Well with Bad Credit.
First off, just because it may be possible to buy something on bad credit, doesn’t mean you should do it, he says. But, if you do decide to go ahead with a purchase, expect to pay more for the privilege.
If you’re planning on buying a car, for instance, it’s going to be tough to secure a decent financing loan if you’re saddled with a poor credit score – although that’s not the only factor at work. Your rate will also vary depending on the amount borrowed, the length of the loan and whether you’re looking at a new or used vehicle.
Subprime Lenders An Expensive Route
The trouble is, as one beleaguered B.C. couple found out recently, even if you can get a loan from a subprime lender, your interest rate – they ended up paying a startling 25 per cent – could be easily double what you’d pay if you had a halfway decent credit history.
For credit-challenged home buyers, getting a decent mortgage rate can be equally challenging. What’s worse, since the amount of money involved is usually so much larger, the costs can really add up, Williams notes.
Again, your credit score is just one of the factors that will come into play in determining what your rate will be. Others include income, debt ratios and the size of your down payment. A larger down payment, for instance, demonstrates to lenders that you can actually save money and will subsequently have more of a stake in the property.
Poor Credit Equals Higher Mortgage Costs
Despite this, homebuyers with a shaky credit history can expect to pay another one to two percentage points from alternative mortgage lenders. The terms of your loan will be harsher as well. That could mean a higher monthly payment or a lower prepayment privilege, depending on what your mortgage broker is able to negotiate for you.
It’s all about risk. If you’ve had trouble paying your bills before, then you’re more likely to have trouble again. If you’ve gone through a bankruptcy or consumer proposal, for instance, lenders quite rightly view you as damaged goods. As a result, most will shy away until you’ve been discharged for at least two years.
So much of whether you get an approval with bruised bad credit depends on whether your life appears to be on the upswing – thanks to a new job or being able to show 12 to 18 months of steady payments of your cell phone or utility bills, Williams explains.
Rehabilitate Your Credit Score
That’s why your goal should be to get your credit score back to a reasonable number (680 to 700 or more) and then make yourself appealing to conventional lenders.
One way might be to start out small with a secured credit card. These cards require a security deposit and offer almost guaranteed approval. The good news is that interest rates are generally not much worse – Home Trust’s Secured Visa Card is charging 14.9 per cent (19.8 per cent on cash advances) – than less restrictive cards.
Just be sure to pick a provider that gives back your deposit after you prove creditworthiness. Doing that will mean paying on time for at least the next year or so, always making considerably more than the minimum payment, and keeping your spending well below your limit.