Bad credit would cost Americans as much as $93 billion to borrow money this year

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• If you have bad credit, your average interest on a personal loan has been sky-high in 2023.
• Bad credit could mean paying 10 times as much on a $5,000 loan as someone with good credit.
• If the 3.5 million Americans taking out loans had bad credit, that difference in interest rate would cost them a cumulative $93 billion.

You can get a personal loan with bad credit, but you will likely have fewer choices and pay much more to borrow than someone with an excellent credit score. The higher interest rate you will pay means you will spend more money paying back the loan.

According to Experian, the number of US personal loan accounts grew by 16% to 25.1 million in the year leading up to August 2022, which means there were around 3.5 million new accounts that year. That's amid growing interest rates throughout 2022 and 2023.

Consumers with bad credit bear the brunt of costs associated with surging interest rates. In mid-January, the average personal loan interest rate for consumers with credit scores below 620 came in at 93.40%. Borrowers with the best credit scores paid an average interest rate of 13.03% for personal loans.

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A loan with bad credit could have 10 times as much interest

All FICO scores fall within a range of 300 and 850, with scores of 670 or higher considered "good" by FICO standards.

If a consumer with poor credit takes out a 60-month personal loan for $5,000 and gets assigned a rate of 93.40%, their monthly payment would work out to $393.55, and they would fork over a total of $18,613.06 in interest over the life of the loan.

Someone with better credit who gets a rate of 13.03%, however, would pay a monthly payment of $113.84 and total interest charges of $1,830.53. In that respect, having really bad credit could cost consumers an average of $16,782.53 more in interest on a $5,000 personal loan.

The cost of borrowing money with bad credit adds up fast

We don't know exactly how many borrowers have good and bad credit, so there's no way to be sure how much more Americans with bad credit are paying on the whole. However, we know that around 3.5 million Americans took out personal loans in 2022. According to TransUnion, the average balance of a new personal loan was $7,925 in the third quarter of 2022.

Assuming the same number of borrowers and the same loan size, if all those people took out loans at an interest rate of 93.40% — in other words, if every borrower in a year had bad credit — the total cost of all those loans would be $131 billion. If those loans were taken with an interest rate of 13.03%, though, the total cost would be only $38 billion.

In other words, bad credit could mean Americans would cumulatively pay as much as $93 billion extra this year.

Bad credit disproportionately affects marginalized groups

Sky-high rates tend to affect some populations more than others, including low-income populations and Black and Hispanic Americans.

Low-income populations are also less confident in their knowledge of credit scores. In fact, a 2020 survey conducted by the Consumer Federation of America found that 58% of low-income consumers said they had fair or poor knowledge of credit scores, whereas only 37% of high-income consumers surveyed said the same.

A recent Credit Sesame survey of 5,000 adults in the United States also found Black and Hispanic Americans had lower average credit scores than white Americans.

How to check and improve your credit score

There are several ways consumers with no credit history or poor credit can turn their situation around. The first is checking their credit reports for errors and other reporting issues, which you can do at AnnualCreditReport.com. While it's also possible to pay a monthly or annual fee for credit monitoring services, AnnualCreditReport.com lets consumers look over their credit reports from all three credit bureaus for free.

But just glancing at your credit reports isn't enough. If a consumer finds there are incorrect numbers on accounts, incorrect late payments, or items they don't recognize on their credit reports, they should take steps to dispute their credit reports.

Other ways to build credit include applying for a secured credit card or a credit builder loan and paying down debt to improve your utilization ratio. Becoming an authorized user on a trusted person's credit card can also help build credit, and so can using an app like Experian Boost to get credit for alternative payments like utility bills and subscriptions for streaming services.

A good credit score is a tool that you can use to meet financial challenges as they occur. You're more likely to meet lending approval guidelines and will be able to borrow money when you need it most.