Our American Dream Show

HOW CREDIT AFFECTS YOUR LIFE

Most people understand that low credit scores will translate into higher mortgage and credit card interest rates. But few realize there are plenty of other insidious ways that low scores can add to a person’s payment costs.

CAR INSURANCE

The fact that some companies base auto insurance premiums on credit scores comes as a surprise to most of the clients who we help.

In fact, according to a recent survey by Conning & Co., 92 of the 100 national and large insurance companies use this avenue. Some only apply it on the initial application for insurance, others pull your score every three years. Thirty-eight percent of insurers who responded to the survey use credit to determine eligibility into different underwriting programs. Fifty-two percent use it to determine both eligibility and rating classification.

The bad news is that consumers with bad credit scores pay between 20 percent and 50 percent more in auto insurance premiums than those with high scores.  That is a substantial difference when you consider all the insurance policies most people buy each year for multiple personal and recreational vehicles they own.

This type of credit profiling is referred to as “Tiered Pricing” in the insurance industry in which different levels of descending credit scores translates to higher premiums.  Basically, the insurance industry has correlated folks with poor credit scores to higher risk clients.

Homeowners insurance policies also are subject to this “Tier Pricing”.

CAR LOANS

Recently, the Consumer Federation of America (CFA) announced that its investigation into American Honda Finance Corporation revealed dealers in this car manufacturer’s network charged different markups to customers from different credit tiers. Those in the least creditworthy tier could face prices that were 3.5 percentage points higher than those with higher scores.

Although they have supposedly capped their markups at 2.5 percent, General Motors Acceptance Corporation and Ford Motor Credit Corporation take the same approach.

Did you ever wonder when you walked into a Automobile Showroom why the salesman wants to get your Social Security Number?  So that his Sales Manager call pull your credit report and then they can decide what to charge you for the car you want to buy.

People with poor credit usually pay an interest rate between 19 percent and 26 percent on a new car purchase, compared with the 6 percent to 7 percent average.

I don’t know about you, but if I had to pay 26% interest on a car loan, I would start checking local bus schedules!
People don’t equate that into dollars and cents.  However, that can be a difference of $100 to $200 a month on your car payment.  It certainly adds a lot more interest to the balance to pay off that new car, especially on a longer term seven year loan.

Some Banks have as much as a 10 per cent difference in car loans they approve, depending on that all important credit score.

It always comes down to how the Lenders see the car loan borrower as a risk that they can assess and determine.

EMPLOYMENT

Most employers today take your credit scores very seriously. The fear is that credit problems at home will create stress and distraction at work.  In turn, it will negatively affect your job performance. If you are their employee, will you be getting phone calls from collectors at work? Will the employer have to garnish your wages?

I have one client who was offered a 25% raise to switch to another company.  She was told all she had to do was interview with a Vice President and she had the job.  What they didn’t tell here was that after the Vice President approved her for the position, the Personnel Manager would check her credit.  They found that she had some credit problems due to her husband being laid off work for six months the past year.  This caused them to be late with some payments and drastically decreased their scores.  She was not hired for the higher paying job!

Today, 70 percent of companies will check credit before they decide to hire a prospective employee. Larger companies are more likely than small ones to check your credit.

HOUSING

Rental Property Owners and their Management Companies will reject tenant applications with poor credit scores as they associate low scores with tenants who will either pay their rent late or not at all.  No Landlord wants a tenant like that as it will cost them a lot of money for a legal eviction.  And, the Landlord depends upon collecting the rent on time so that he can pay his mortgage on the rental to his Bank.

UTILITIES

Most families who apply to Utility Companies for service when renting or buying a home are shocked that their credit scores are checked.  Poor credit scores usually require a much higher deposit paid upfront before the telephone company will connect your line or the electric company will turn on your lights in the new house.
CELL PHONES

These providers increasingly rely on credit scores to sort the good risks from the bad credit. And bad credit definitely doesn’t get the best deals at Verizon. Instead of contract plans that offer more minutes for your dollar and come with a wider selection of phones, those who do not make the credit cut must use prepaid cards for cell phone service.

DOCTORS

I had a client who was considering laser eye surgery, the doctor immediately pulled her credit score to see if she qualified for his monthly payment plan. Otherwise, the cost of the procedure was due before surgery was scheduled.

This also happens with Plastic Surgeons, Oral Surgeons, and Orthodontists for the kids’ braces.

SCHOOL LOANS

I know a son of a friend of mine who was turned down for a student loan to attend Medical School because of his poor credit score.

He isn’t alone.  I have also watched other individuals delay their college plans when their scores disqualified them from university and federally funded loans. And in this case, it isn’t a matter of having to pay a higher interest rate because of poor scores.

It’s black and white. You either get financing or you don’t.  Poor credit getting in the way of achieving your educational goals is a high price to pay.

MARRIAGE

Most folks think that a married couple has a combined credit score. Nope. You can’t marry your way out of a bad FICO rating, and many times a large difference in credit scores between partners causes too much tension for the marriage to survive. I have personally known couples who called the wedding off when a poor credit score was disclosed.

Can you imagine your fiancé telling you, “Sorry, honey, I love you, but until you get your credit score up to 700, the wedding is off.”

For example, let’s say one of the engaged parties own a home.  If the owner spouse dies, the home and mortgage become part of the estate. If the surviving spouse wants to take over the mortgage, he or she needs to qualify with credit and income to the Bank holding the home loan.  Most people rely on the fact that they’ll live to pay off the mortgage, so this isn’t a concern. Big mistake!

Unfortunately, more Americans are becoming very much aware that credit can affect most aspects of their lives. The need to have good credit today is not just an option, it is a necessity to be able to live a full and productive life.

People with poor credit scores will continue to be victimized by Banks, Employers, Landlord, Utility Companies, Doctors, and even a potential spouse unless they take action and get some help with their credit scores.