debt

Bad credit hurts in many ways


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 canceled out all of her positives with potential employers. And that was in 1994.

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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.

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