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
It comes as a surprise to most of the clients
working with Trish Lynch, a financial specialist with ClearPoint
Financial Solutions in Richmond, Va: Yes, some companies base your
auto insurance premiums on your credit scores.
In fact, according to a 2002 survey by Conning & Co., 92 of
the 100 national and large regional players it queried use this
avenue. Some only apply it on the initial application for insurance,
others pull your score every three years, says Bruce Hale, a Conning
research analyst. Thirty-eight percent of insurers responding to the
survey use credit to determine eligibility into different
underwriting programs. Fifty-two percent use it to determine both
eligibility and rating classification.
It boils down to consumers with bad credit paying between 20
percent and 50 percent more in auto insurance premiums than their
good-credit neighbors, says Clarence Smith, who authored Conning's
study.
"It's profiling," Lynch says. "Think about it: If you have all
these credit issues, a lot of times your mind is not exactly where
it should be, like when you're driving."
Homeowners insurance policies also follow this path.
Car loans
In 2004, the Consumer Federation of America
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 their better credit brothers.
Although they have capped their markups at 2.5 percent, both
General Motors Acceptance Corporation and Ford Motor Credit
Corporation take the same approach.
People with poor credit usually pay from 19 percent to 26 percent
interest rates on a new car purchase, compared to the 6 percent to 7
percent average, says Lynch. "People don't equate that into dollars
and cents. That can be a difference of $100 to $200 a month on your
car payment. It hits the pocketbook kinda heavy," she says.
Meanwhile, at Citizens Bank in Green Bay, Wis., client advisor
Jeanne Wolf has seen as much as a 10 point difference in car loans
she approves, depending on that all-important credit score. "It's
about what the perceived risk is to the companies offering the
loan," she says.
Job
The second shock that hits Lynch's clients between
the eyes: employers care about those credit ratings.
Just ask Sanyika Calloway Boyce, a "financial fitness coach" who
graduated from Norfolk State University a semester early with honor
society membership, several internships and $15,000 in unsecured
debt. She says the latter cancelled out all of her positives with
potential employers. And that was in 1994.
Today, 70 percent of companies will check credit before they
decide to hire a candidate, says Doug Borkowski, a financial
counselor for Iowa State University's Financial Counseling Clinic.
Larger companies are more likely to check than small ones.
The fear is that credit problems at home create tension and
distraction at work, Lynch says. "If you are their employee, will
you be getting phone calls from collectors at work? Will the
employer have to garnish your wages?" she asks.
Housing
Rental property owners may reject tenant
applications with poor credit scores, something only 48 percent of
consumers know, says the CFA.
Utilities
Only 30 percent of the Americans that CFA
surveyed know that utilities, too, care about credit scores. Even
slow credit indications are enough to slap you with a $500 deposit
before the telephone company connects your line or the electric
company turns on the juice, says Lynch.
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 sweetest deals at Verizon. Instead of
contract plans that offer more minutes for your dollar and come with
a wider selection of phones, those who don't make the cut must
consider pay-as-you-go phones.
Elective medical procedures
When Lynch looked into
laser eye surgery, the doctor immediately pulled her credit score to
see if she qualified for his monthly payment plan. Otherwise, the
bill is due in full at the counter. "They're not denying you
service, and if it were a mandatory treatment, this would never come
up," she says. Wolf has seen the same situation at orthodontist
offices.
School loans
When Judge John C. Ninfo II, chief judge
of the U.S. Bankruptcy Court for the Western District of New York,
made a documentary as part of his "get out of debt now" program for
high schoolers, he included the sad story of a Nazareth College of
Rochester student who was turned down for a law school student loan
because of his FICO score.
He isn't alone. Lynch, too, has watched families' dreams burst
when their scores disqualified them from university and federally
funded loans. And in this case, it isn't a matter of sucking it up
and paying a higher interest rate. "It's black and white. You get
financing or you don't," she says. "Not furthering your education is
a far-reaching consequence."
Marriage
More than half (52 percent) of CFA survey
respondents think 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 disparity between partners causes too much tension for the
marriage to survive, says Brette McWhorter Sember, author of "The
Complete Credit Repair Kit." She personally knows several couples
who skipped the church aisle over it.
"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 for credit," says Sember. "Most people
bank on the fact that they'll live to pay off the mortgage so this
isn't a concern."
Unfortunately, Wolf adds, more and more Americans are becoming
acquainted with these uses of credit scores the hard way. "People
who need the loans typically are paying the higher payments. It's a
Catch-22. Once they get bad credit, it is difficult to overcome with
these bills," she says.
