The Hidden Cost of Poor Credit
By Chris Prod – Former Financial Fitness Program Manager at the DuPage Homeownership Center
For many households in the United States, a good credit score is a given. For others, in particular low-and moderate-income households, there is simply not enough focus on building and maintaining good credit and the consequences can be profound.
Without decent credit and a credit card it’s nearly impossible to rent a car, book a hotel room, or purchase from an online retailer. Without even a small amount of personal credit – say a $500 limit Visa or MasterCard – when emergencies pop up they are forced to turn to non-traditional financial service products. The Pay Day Loan that they may have to use could have interest rates between 400% and 500% and can add significantly to the cost of money they need just to get by.
Many employers include credit scoring as part of their pre-employment background checks. Imagine being passed over for a desperately needed job because of a poor score. Do you need a car to get to work? Instead of receiving the 0.0% interest rate for 60 months auto financing available to well-qualified borrowers, those with low credit scores are forced to accept loan terms in excess of double digits. What does this mean? A borrower financing $20,000 over five years at just 10% will pay $91.61 more each month and $5,496.65 over the life of the loan. For the most vulnerable this is a real barrier to building self-sufficiency. They face not only a higher car payment, but it’s likely their auto insurance will also cost more – sometimes double what a household with good credit would pay.
These additional costs make it hard for these households to get even let alone get ahead. Hard choices may need to be made. Often these choices are between basic needs and on time payments. These choices then lead to late payments and late fees and falling even farther behind. It’s a vicious cycle that’s difficult to break. It’s difficult, but it’s not impossible.
You can ruin your credit with just a few mistakes over a short period of time. Rebuilding that credit could take 18-24 months for households that are “willing and able” to begin the process. Willingness is very important, but if they just don’t have the ability (funds) to pay off debts, collections or liens little can be done.
In our Financial Fitness Program at the DuPage Homeownership Center we work with clients just like this every day. By helping them to gain control of their financial situation they begin to build the life-long tools they need to become self-sufficient. They learn not just how to get even, but how to get ahead.
Did you have little or no financial education in high school or college? How did you learn? For many it’s trial and error. That’s another way to say I learned from my mistakes. We didn’t know, we didn’t understand. If only we’d had some sort of financial capability training maybe we could have avoided these common financial mistakes.