It doesn’t discriminate between people who make a ton of money…
And people who make just a little money.
One way or another, it will bite you.
I’m talking about bad credit…
See, I just read two articles (which I reference at the end of this email) that explain the big difference between bad credit and good credit in today’s economy.
Here are some of the shocking statistics:
- On credit cards, a consumer with a great credit score (720+) will pay about 12.9% in interest; a person with a 659 credit score will pay about 20.3% in interest.
This means that on a $5,000 balance, borrowers with poor credit who pay $150 a month will pay an extra $1,186 in interest. That’s almost double the interest paid by those with great credit.
And it means the borrower with poor credit will be making those $150 payments for eight extra months!
- The difference between a 740 credit score and a 679 credit score on a $10,000 five-year car loan is about $2,760 over five years—or an extra $552 a year.
- And on a 30-year mortgage, borrowers who take advantage of today’s low interest rates still end up paying an extra $3,312 each year in interest if their scores are low (on a $300,000 loan).
So let’s do the math and see how this adds up…
Let’s imagine two people:
1) Person #1 has great credit, a 30-year mortgage on a $300,000 house, $5,000 in credit card debt, and a new car loan of $10,000.
2) Person #2 has all of the above, but poor credit.
Over five years, Person #2 will pay an extra $20,506 in interest!
It bears noting that these days, borrowers with less-than-stellar credit might not even qualify for loans. The Wall Street Journal article notes that 90 percent of all loans originated in 2011 were given to people with high credit scores!
In one of the articles, the author writes: “Lenders say the premium for poor credit is necessary to manage their exposure to risk.”
What do you think? Is this “credit divide” fair? Leave a comment below, and let me know what you think!
If you want to read the articles in their entirety, here are the links:
Fed Wrestles with How Best to Bridge U.S. Credit Divide
by Jon Hilsenrath
The High Cost of Low Credit Score
by AnneMarie Andriotis
– Philip Tirone