How Having Bad Credit Could Cost You $100,000 Over Decades

Debt can snowball fast. The credit card you opened for travel benefits can quickly turn into a mountain of bills. And the cost isn't equal for everyone: a recent Bankrate study found that individuals with a 620 credit score or lower shell out $3,400 more annually for their loans and insurance than those with a credit score of 700.

Once interest and fees pile up, debt is tough to control, but you can avoid this so-called "subprime tax." If you need to eliminate some money stress, here's what you need to know about your credit score and how it affects your financial future.

A "subprime tax" is a phrase that describes the higher cost of borrowing for individuals with lower-than-prime credit scores, basically 620 or lower. The higher price tag for these borrowers applies to credit cards, home loans, and even insurance rates.

Ultimately, it means interest rates for borrowers with lower credit scores will be higher. Lenders justify this extra cost by saying that these borrowers are a higher risk for them to take on.

Subprime taxes are directly related to credit scores. So, if you sign on to a less-than-ideal interest rate for your home loan since you have a low credit score but never improve your score (or it dips), you'll experience an increasing rate of subprime taxation.

Bankrate analysts estimate that these additional costs could cost some borrowers close to $100,000 over the course of 30 years.

Far more people are hit by the link between low credit and costly borrowing than you might expect. Bankrate estimates that around 21% of Americans are charged more for their financial products due to their credit score.

That's almost 72 million people affected by the subprime tax rate. So, if you feel like you can't get ahead of the costs of debt, you're not alone.

Bankrate's study makes it abundantly clear that Americans who find themselves stuck in a cycle of debt have multiple forces working against them. Between an already high-interest-rate environment, rising costs of living, and steep lender penalties for low credit scores, Americans literally can't afford to have bad credit.

The good news is, there are steps you can take to increase your credit score and avoid paying extra for already expensive loans and insurance.

Your credit score is a snapshot of how you've managed debt over time. Paying credit cards on time, avoiding maxed-out balances, limiting new accounts, and handling diverse debt responsibly all work in your favor.

On the other hand, if you've kept a balance on your card each month, opened and maxed out several cards, and don't have diversified debt, your score will dip.

The reason why getting credit can be expensive or elusive for some is the risk it poses to lenders. Say you apply for a credit card with a $2,000 limit. The lender wants to be sure you're a low risk, so they check your credit score.

If it's high, you're approved with better terms. If it's low, expect higher fees or interest to offset the risk of late payments.

With these factors in mind, there are several practical ways to boost your credit score. Keep credit utilization under 30%. Using less than your available limit is an easy win. Limit running hard credit checks, since having too many done can lower your score.

And most importantly, always pay your credit card bills on time. This is the most crucial way to build better credit and stop paying the dreaded "subprime tax".

The journey to get out of debt is full of twists and turns. It might mean a comprehensive financial assessment to reset your plan, building habits like avoiding new credit cards, or even testing a "no-spend" challenge to regain control.

For the 21% of Americans living with the extra cost of subprime tax rates, relief is closely tied to their credit score. The good news is that these rates are constantly being updated and can change for the better with a few healthy money management habits.