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Everyone knows that if your credit score goes down, the interest rate on a subsequent loan that you take out will go up. The questions are: by how much will your interest go up, and what moves can you make that will send your credit score dropping?
The answer is easy for that last part. Just about anything you do will affect your credit score in some way. Even doing nothing — not opening a credit card account, buying zilch — can mean your credit score will creep upward or downward. But how much your loan's interest rate will climb, or occasionally drop, based on how much debt you take on, is always harder to answer.
The marketing team at FreeScore.com believes they have a tool allowing you to get that answer. FreeScore.com, a consumer credit subscription service ($14.95 a month) that gives you unlimited access to your three credit scores and your complete credit profile. The FreeScore.com Credit Score Simulator, like the credit scores, can only be accessed by paying for a membership or participating in their free trial period (that's the "Free" part of FreeScore).
FreeScore.com recently culled data from their own members' calculations using the simulator. The data show that if you have a fairly decent credit score (i.e., low 700s) but a shaky credit history (i.e., it's a short history, or you've been missing payments) and you increase a credit card balance by $2,000 can typically expect to see your credit score fall approximately 30 to 60 points.
That would translate into paying around $3,000 extra in interest — on top of the interest you would have paid if you hadn't increased your credit card balance.
The news is better, but not all that much, if you have a wonderful credit score (say, 790) and you've also missed a few payments lately, or you don't have a lengthy history. You could still see your credit score drop that same 30 to 60 points, into the mid-700s, and wind up paying around $1,500 extra in interest on a car loan.
What does all of this mean? It means something that hopefully most credit card users already know: If you're going to be taking out a loan soon, and if your credit score or history is on dodgy ground due to, say, having a few late payments in the last year, now is not the time to do anything dramatic with your credit cards, like purchasing a 55-inch plasma TV or a pony.
But FreeScore's numbers also underscore the futility of carrying a lot of revolving debt. Think about it. If you have a credit score of 700, and you buy a TV for $2,000 and put it on a credit card and keep it on the card, and then you start making the rounds at the dealers and purchase a car, you're not only still paying interest for that $2,000 TV, you're going to wind up paying $3,000 more than you need to for your car. Plus, your credit score, now in the mid-600s, is likely to stay there for awhile.
Is there any good news in FreeScore's numbers? A little. Their numbers show that a select number of people who add $2,000 of revolving debt to their credit cards will actually see their credit score go up (but no more than 16 points, according to their calculations). But that's only if you possess very little debt and have almost no credit history.
"Having too little credit can also lower your scores," says Carrie Coghill, director of consumer education at FreeScore.com.
All of these numbers should be taken with a proverbial grain of salt, of course, since it's tough to match credit score generalities with an individual's situation. But for most of us the lesson from these numbers is clear. Don't add revolving debt to your credit cards, but if you insist on going down that path right around the time you're thinking of buying a car, buy the car first.