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Americans with the Lowest Credit Scores

Americans with the Lowest Credit Scores

Role models are a thing, but so is the opposite: what can we learn from Americans with the lowest credit scores?Credit scores are the backbone of financial solvency. Without a decent credit score, Americans will find it harder to get approved for home loans, car finance loans, business and personal loans. Or, to get these at an attractive interest rate, at the very least.

The average credit score is as high as it has ever been at 695. However, there exist Americans, whose credit scores dip well under 620. Who are these people, and what can we learn from them?

Are Millennials Blame-Worthy for Low Credit Scores?

At first sight, people tend to target the younger millennials, 18 to 30. These millennials are viewed as fiscally irresponsible because their credit scores are in the bad credit range. But it’s possible to give them a pass on this one, due to the 2009 CARD Act. The CARD Act has made it nearly impossible for the 18 to 21 demographic to apply for new credit cards. The outcome is young millennials struggle to build a credit track record.

The way the FICO scoring, and other similar scoring systems, work is by assessing a number of factors. These include:

  • the number of tradelines (sources of credit) a person has
  • the payment history of each (do they pay consistently and on time?)
  • their debt-to-limit ratio (over 30% of one’s credit limit will lower the score)

When young millennials cannot open enough credit, it will take years upon years to raise their credit scores to an acceptable level.

The Largest Debt Burden Falls to Growing Families

With all this being said, let’s turn our attention to the 30- to 39-year olds. This is the highest percentage demographic that has the lowest credit scores. Why do 30-somethings possess the lowest credit scores? It’s not they haven’t had enough time to build a healthy credit payment history. They’ve had a decade or more.

Evidence suggests people in this age range are debt-burdened up to their ears in student loans, lavish weddings, house payments, and starting families. We’re not including all the expenses it takes to furnish an upper-middle-class lifestyle. These include cars, vacations, school tuition, healthcare, pre-school, etc.

What compounds the settling-down-and-starting-a-family-meet-mate-and-propagate chain of events is the glaring statistic. Just 41% of adults in the U.S. put together a budget and stick to it. Is it any surprise then 30-somethings are challenged with keeping their credit scores healthy?

The Devil is in the High Interest Rates

The bug-a-boo to possessing a low credit score is the higher interest rates you must pay to get approved (provided you do) for new lines of credit. If you’re trying to manage multiple credit cards with higher interest rates, you’re going to be in debt. We dramatize the swelling of debt exponentially for a reason: to get you to take steps to rein in your lines of credit, do some repair work on them, and get with the program of learning how to manage your debt load and improve your credit score.

The 30% Solution

We repeat: never exceed 30% of your credit limits. If you’ve got a $1,000 limit on one credit card, you’re wise to stop your spending at $300. Otherwise, the big three credit bureaus will ding your credit score. Multiply this by the other credit cards you may also be carrying. If you’re exceeding 30 % of your credit limit on those too, you’re going to end up with more damaged credit. The more hits to your credit scores, the lower your credit score.

Lenders look at the aggregate of your credit accounts. This is to judge whether you’re a good credit risk for future lines of credit. If they see you’re doing a shoddy job of managing your credit cards, approval is either off the table, or excessively high interest rates will be charged if you’re approved.

Let’s Get Real

To get concrete about how bad credit can set you back financially here’s an example: If you’ve got a pretty respectable credit score of 700 (average / fair), and you sign on to a 30-year house mortgage of $300,000; at today’s interest rates you’d qualify for a 4.101% interest rate. That would come out to $1,450 for monthly house payments.

However, if your credit score is an abysmal 620 (bad), the interest rate would shoot up 1.367% to 5.468%, and now your monthly house payment would be $1,697. That $247 difference each month could add up to approximately $3,000 on just the interest each year. You can run the figures yourself, but over 30 years (interest and monthly payments combined) it would top out at nearly $2 million more you’d be paying for your home!

Takeaways

We paint a drastic scenario of what a low credit score can do to your finances and the future health and well-being of your family. All in order to get your attention on how to improve your credit score:

  • Go to the big three and pull your credit report to find errors. You may be one of the 20%, whose credit report does contain errors. Disputing those errors and resolving them could bump up your credit rating immediately.
  • Start paying down credit cards with high interest as much as you can afford. Tighten your belt and / or take a side job for the time being to help get those high interest debts as low as you can or paid in full.
  • Once again, we re-emphasize not to use more than 30% of your credit limit. Lenders look favorably upon credit card holders, who can control their spending.
  • One final word of advice: you’d be prudent to sign up for autopay email reminders. A safer route (because autopay has been known to screw up) is to set up monthly bank transfers to pay your expenses.

For more information on average credit scores in America according to age, income, state, and home buyers, including tables and charts go to https://www.valuepenguin.com/average-credit-score.

Drowning in debt

Student Debt at an All-Time High

Student Debt at an All-Time High

As college tuition rises exponentially, students are taking on more debt to earn a degree. The latest figures on student debt show it has shot up to $1.4 trillion. This is up twice the amount it was in 2009.

Now, young adults, who have earned graduate and post-graduate degrees, fear disclosing the amount of their student loan debt to their significant other. Millennials, who have taken on an enormous debt burden to earn a degree, are mired in debt shame.

Avoiding the Student Loan Debt Conversation

Although large debts are becoming increasingly common, they’re still negatively perceived. Nearly 40% of millennials would rather reveal they’ve previously contracted a STD than the amount of debt they have. The reasoning is this. Excessive student loan debt is likely to scare off a person contemplating a future together and all that entails: buying a home, having children, contributing to college and retirement funds, and having some disposable income left over. If a potential partner is in the hole to the tune of $10,000 to $100,000 and above, the romance grinds to a halt.

Debt vs STD

Image reference: SoFi

The Safer Choice: Lying

In the same survey, nearly 25% of survey respondents answered they would reconsider entering a union if a potential spouse’s debt burden exceeded $100,000.

debt-graph

Image reference: Bloomberg

The SoFi survey also questioned respondents about when they would decide to reveal their student loan debt. Almost 60% of respondents answered they’d procrastinate telling their partner about their student loan debt until after they’ve moved in together.

Stats also show in the SoFi survey almost 25% of respondents reported a date or partner had misled them on the amount of debt they’re in. Millennials also generally felt disclosing student loan debt wasn’t necessary until the relationship was headed in a serious direction. This generally meant starting to talk about living together or marriage.

Responding to the question of what amount of student loan debt would make a potential mate head for the hills, 38% answered it would depend, rather than give an exact figure at which they would bail from the relationship.

Life in the Real World, Student Debt, and Its Consequences

Stories abound of students, who fall deep into student loan debt and can’t find work in their chosen profession. Instead they end up on food stamps and toiling at a job for minimum wage. They are ridden with guilt and shame about how they became over-burdened with debt.

Either disclosing an STD or your debt cannot be taken literally. No one is eager to reveal such intimate details of their prior sex lives, but by the same token no one is quick to disclose what financial straits they are in, in fear of losing a committed relationship.

Debt shame and its consequences can have disastrous results. Some people with a tremendous amount of student loan debt become a shopping junkie. Spending money like a drunken sailor eases debt shame but at the same time exacerbates it. It’s a short-term fix with terrible long-term consequences

If you’re in a committed relationship, you must initiate the money conversation. Understanding each other fully, financial situation and all, is necessary to having an open, trusting relationship. And don’t forget that debt shame is a very real phenomenon that needs to be talked about. Only then can we help each other heal from it.