Image: Dollars down drain © Stockbyte-SuperStock

Bad or even mediocre credit can cost you a fortune over your lifetime.

That was true even before the credit crunch, when I first put together the example of two fictional women, Emily and Karen, for my book "Your Credit Score" and tracked what they paid in interest over a lifetime.

Now, with lenders much pickier about who they loan to, the contrast in score-based interest rates is even more stark on many loans. The short version: Lower scores can cost you hundreds of thousands of dollars in extra interest and radically change the way you're able to live your entire life.

Here's a scenario that can help you understand how.

Emily and Karen are friends who borrow about the same amount of money over their lifetimes:

  • Each gets $20,000 in private student loans to help pay for college.
  • College is also when they get their first credit cards, and they each carry an $8,000 balance, on average, over the years.
  • They buy new cars after graduation and replace them every seven years until they buy their last vehicles at age 70. Each buys her first home with a $300,000 mortgage at age 30 and then moves up to a larger house with a $400,000 mortgage after turning 40.
  • Liz Weston

    Liz Weston

    Each takes out a $50,000 home-improvement loan to remodel the second house.

But Emily has a FICO credit score of 750, which is considered good to excellent. Karen has a 650 score, which is considered fair to poor, depending on the lender.

Emily maintains her good credit scores by always paying her bills on time, applying for credit sparingly and never maxing out her credit cards. Lenders respond by increasing her credit limits and giving her more offers of credit, allowing her to spread her balances across several cards and further protect her scores.

Karen, on the other hand, doesn't always pay on time and sometimes maxes out her cards, which makes lenders reluctant to extend more credit.

She tends to carry larger balances on fewer cards than Emily, which further hurts her scores, and Karen has less ability to negotiate lower interest rates.

The following examples of what they pay are only illustrations.

In real life, interest rates will wax and wane over time while the amounts paid for houses and cars will vary. But the illustrations will give you a pretty good idea of the potential cost of not-so-great credit.

Private student loans: An $8,000 difference

Federal student loans don't take credit scores into account, but private student loans do, and the penalty for worse credit is significant.

Interest rates vary by lender, but someone with a 750 score can expect rates that are around 5 to 6 percentage points cheaper than someone with a 650 score, said Mark Kantrowitz of FinAid.

The extra cost of a student loan
Interest rate7.25%13.25%
Montly payment$234$234
Total interest paid (10 years)$8,176$16,189
Karen's penalty $8,013

Please note that while supplemental private student loans remain available, reforms passed in the 2010 Student Aid Fiscal Responsibility Act have taken private lenders out of the business of most student loans and capped interest rates at 6.8%. But for those already out of college, the legislation comes too late to help their finances.