Take insurance, for example.
“Bad credit will make your insurance cost more or will render you ineligible except for the most expensive coverage,” says Eustace L. Greaves, Jr., owner of Greaves Financial Services and The Bridge Insurance Agency in Brooklyn, New York.
Greaves offers a few real-life examples of some recent clients. “In one instance, I had two clients in Bed-Stuy, both with brownstones. The houses were similar in construction and were basically a mirror image of each other,” Greaves says.
But the two clients – who were both women – differed in one significant way: their credit profiles.
The first woman had excellent credit, Greaves says, and the annual premium for her homeowner’s insurance totaled $1,350 a year. Meanwhile, the second woman had less-than-perfect credit and had to pay $2,400 a year for coverage.
How home insurance costs go through the roof
Why such a high rate for the latter client? It’s likely that the woman had one of what Greaves calls “the five credit sins”:
- Bankruptcy in the last five years
- Any collection items at all
According to Greaves, if you have any of the above five items on your credit report, it’s going to hurt your insurance credit score and cause you to pay considerably more for things like auto, homeowner’s or renter’s insurance. So over a decade, the woman with great credit will save nearly $11,000.
Even more startling, the cost to the female client with bad credit had been previously higher. Greaves says he secured the $2,400 a year premium for the client with poor credit only after getting her out of an even more costly insurance plan.
“I was taking her out of ‘forced place’ insurance,” Greaves says. “Her mortgage bank was charging her $6,000 a year for forced place insurance.”
As this Bloomberg article explains: “Most mortgages also allow the lender to purchase insurance for the home and ‘force-place’ it if a policy lapses or is deemed insufficient. These standard provisions are meant to protect the lender’s collateral — the property — if a calamity occurs.” Unfortunately for consumers, forced place insurance can often run five to 10 times the cost of standard insurance coverage.
Are you more like Bill or Skip?
Greaves’ examples reminded me of my own research into the overall financial impact of having bad credit. In my book, Perfect Credit, I told the story of Bill and Skip. Bill paid his financial obligations on time, managed debt wisely, and had great credit. Skip routinely missed payments, mismanaged his finances, and had lousy credit.
Over the course of a lifetime, Bill saved or earned more than $1 million compared to Skip, who constantly paid more for everything – including mortgages and loans, and was passed over for promotions and other job opportunities because of his bad credit track record.
Bill and Skip are hypothetical figures. They’re not portrayed as black, white, Asian or Hispanic. That’s not the point. The point is to highlight how much you can save or earn by having great credit – and how you go about achieving perfect credit. (Here are my 6 ways to maximize your credit score.)
Besides, it’s important to note that amid the Great Recession, credit scores dropped for many individuals, regardless of race. A FICO analysis found that nearly 50 million people saw their credit scores fall by more than 20 points amid the peak of the financial crisis.
But Blacks appear to have borne the brunt of this credit deterioration – primarily because African-Americans were disproportionately impacted by job losses and the wave of foreclosures that have swept the country in recent years. Indeed, research from VantageScore has revealed that the two largest factors in declining credit scores were tumbling home prices and unemployment.
So regardless of race, the lesson here is simple: We all need to stay on top of our credit at all times. Otherwise, you risk being financially penalized and disenfranchised for decades, in ways you may not even realize.
Lynnette Khalfani-Cox, The Money Coach®, is a personal finance expert, television and radio personality, and the author of numerous books, including the New York Times bestseller ‘Zero Debt: The Ultimate Guide to Financial Freedom.’ She has appeared on such national TV programs as ‘The Oprah Winfrey Show,’ ‘Dr. Phil,’ ‘The Tyra Banks Show’ and ‘Good Morning America’ sharing her success story and teaching millions about proper money management. Follow Lynnette Khalfani-Cox on Twitter at @TheMoneyCoach.