African-Americans and credit scores: How the mortgage meltdown permanently impacts many blacks' finances

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A recent Washington Post article examined how the meltdown in the mortgage market has led to a sharp decline in credit scores for blacks. The Post article emphasized how poor credit makes it much tougher to secure loans and gain access to credit, especially for African-Americans. The significant loss of black wealth through foreclosures following the disproportionate number of costly sub-prime mortgages granted to blacks might place many African-Americans in a permanent bad credit underclass.

“At issue are the largely invisible but profoundly influential three-digit credit scores that help determine who can buy a car, finance a college education or own a home,” the Post said. But talking about credit scores exclusively in the context of credit and loans is incomplete and misses the mark. In reality, the financial fallout from having bad credit touches a person’s life in many more ways – not the least of which relate to jobs, housing and insurance. Critical areas of social functioning impacted include:

• Being able to rent an apartment in a decent neighborhood
• Being able to purchase inexpensive homeowner’s or renter’s insurance
• Being able to qualify for reasonably-priced car insurance at Moneyexpert.com
• Being able to get a job if you’re unemployed
• Being able to secure a promotion if you’re already working

Believe it or not, all of these things may be out of reach – or certainly far more difficult and costly – if you have a poor credit rating. And herein lies the problem for many blacks, and others, too. Now that so many African-Americans have lost their wealth through losing their homes, many more may also face the fallout that the resultant poor credit scores will bring. And that aftermath may unfold indefinitely.

The problem is that Americans, by and large, tend to only pay attention to their credit ratings when it’s time to apply for a loan or credit. In fact, a survey from the National Foundation for Credit Counseling revealed that seven out of 10 Americans don’t check their credit reports each year. Ditto for people checking their credit scores.

Sure, we may pull our credit reports when it’s time to buy a home or refinance a mortgage. Or we may check our credit scores before seeking another credit card or filling out a student loan application. But what about the times when there’s no banker scrutinizing your financial history?

“If you walked up to 100 people and asked: ‘Do you know your credit score?’ I’ll bet less than a quarter of them do,” says Bill Hardekopf, chief executive of LowCards.com. “Unfortunately, the credit score doesn’t get the attention it really deserves even though it has so many far-reaching ramifications.”

Does bad credit = no job?

To be ignorant of your credit score and the information contained in your credit report is a shame these days, especially when you can readily obtain both online.  You can even get your credit reports from each of the three credit bureaus – Equifax, Experian and TransUnion — free of charge each year at AnnualCreditReport.com.

If you want to get ahead in your career, it’s also vitally important to review your credit. The link between credit and jobs can’t be overstated, particularly in the current tough job market. With unemployment rates for African-Americans in the double digits, black job-hunters need to do everything they can to make themselves more attractive to potential employers. You don’t want a spotty credit report to take you out of the running for a new job – or a promotion at an existing job. Yet, that’s exactly what happens every day.

Employers don’t usually say it outright, but they frown upon bad credit – and have even been known to rescind job offers after checking a person’s credit and finding it lacking.

The Society for Human Resources Management reports that nearly 60 percent of employers in the U.S. now use credit checks as part of their screening process for either some or all job applicants. That’s just one reason why some blacks – and others with shaky credit records – are having trouble landing work.

But even if you’re not currently looking for a job or you’re not presently in the running for a promotion, you should still keep close tabs on your credit. To do otherwise is financially foolish and likely costing you gobs of money.

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
• Foreclosure
• Repossession
• Judgment
• 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. Individuals who are planning to buy a property may speak with a few mortgage brokers to explore more financing options.

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.