Why you have multiple credit scores
Let’s say you want to buy a new car but your credit score is only 620. This score is considered “poor,” and without a cosigner, it will be difficult to get that sweet ride you’ve been eyeing. Lenders consider any score less than 660 as risky or subprime (poor or below average) and may offer you a loan with a higher interest rate to offset the risk that you’ll default.Case study: Sandra's experience
Sandra is looking to buy an inexpensive used car from a private seller. She finds a good vehicle that runs well listed for just $8,600. Her lender says that, because Sandra’s credit score is 620, she’ll have to pay 15% in interest on a loan to buy the car.
620 credit score: Monthly payment on a $7,600 loan at 15% interest
| Loan amount | $8,600 |
| Interest rate | 15% |
| Down payment | $1,000 |
| Loan term | 48 months |
| Monthly payment | $212 |
After 4 years at 15% interest, Sandra will have paid $10,153 for her $7,600 loan (or $8,600 minus her $1,000 down payment). That’s $2,553 in interest over the life of the loan.
With an improved credit score, Sandra is eligible for a lower interest rate. For example, here’s the same transaction with a “very good” credit score of 740.
740 credit score: Monthly payment on a $7,600 loan at 5.9% interest
| Loan amount | $8,600 |
| Interest rate | 5.9% |
| Down payment | $1,000 |
| Loan term | 48 months |
| Monthly payment | $178 |
Here, after 4 years at 5.9% interest, Sandra will have paid $8,544 for her $7,600 loan – or $944 in interest over the life of the loan.
With poor credit, she’ll pay $34 more per month for the same car — more than $1,600 in interest over 4 years. This is the cost of having a lower credit score. If you applied those same interest rates to a $300,000 house, you’d be stunned at the difference in what you could be paying.
