Most individuals know having low credit scores cost more than having a high one. However, what few customers ever learn is just how expensive their low credit score really is. Today we WON’T talk about the fact a low credit score could cost you a great job (because over 50% of employers are now running credit checks on job applicants).
We WON’T talk about the fact you could end up paying up to 40% more for your auto insurance (simply because most insurance companies now check credit when quoting premiums). We WON’T talk about the fact many utility organizations for Electric, Gas, Water or Cable now need a deposit before services can be turned on because of a low credit score.
We WON’T discuss about the other FIVE ways a low credit score will cost you income and make life more difficult every month.
No… today we’re going to discuss about the one way a low credit score will cost you a lot of money and why the financial institutions and credit bureaus love your low credit score (if you choose to do nothing about it). This one element of credit if not addressed will cost the average American over $100,000.
Even worse, it can cost the average mortgage broker or loan officer over $100,000… each year. The saddest part of all? The banks and credit bureaus win if you choose to do nothing mainly because it’s your loss and your loss IS their gain. Let us explain…
We all know the biggest purchase a consumer will make in their lifetime is their house. As a result, the greatest amount of interest ever paid in a consumers’ lifetime will be on the loan, for that residence. Again, most consumers know with a minimal credit score they’re going to pay a higher interest rate on that loan.
However, few consumers ever study the REAL amount that increased interest ends up costing them over the life of the mortgage. After all, the typical American Consumer now lives in a world where their only focus when financing anything, is all about…The MONTHLY Payment.
This sort of thinking feels good in the short run but becomes high priced in the long run. Let’s look at some factual numbers as to why with the story of Bill and Ted.
Bill and Ted both bought homes in the same community, on the same street and for the same price. Bill had a high credit score and borrowed $180,000 to purchase a 4 bedroom 3 bath home. Because of his higher credit score he got a 30 year fixed rate loan at 5.5% interest. Here’s what Bills mortgage looked like:
His loan sum was $180,000. His interest rate was 5.5%. This gave Bill a monthly payment of $1022.02. His payments over 30 years totaled $367,927.00. His interest paid over the term totaled $187,927.00 (Of his $367,927 in total payments… $187,927 went to interest).
Bill paid for his house twice after interest, but don’t cringe until finally we’re done talking about Ted.
Ted had a lower credit score and borrowed $180,000 to acquire a 4 bedroom 3 bath home on the same street as Bill. He got a thirty year fixed loan as well, but due to the fact of his reduced credit score his interest rate was 8.0% instead of Bills 5.5%. Here’s what Ted’s loan for the exact same $180,000 loan looked like:
Ted’s loan sum was $180,000. His interest rate was 8.0%. This gave Ted a monthly payment of $1320.78 (about $300 more per month than Bills). Ted’s payments over 30 years totaled $475,479.00. Ted’s interest paid over the time period totaled $295,479.00
The problem is NOT that Ted paid over $295,000 in interest on his loan of $180,000. The true concern is that Ted paid $108,000 MORE in interest than Bill since his credit score was lower!
Teds total home loan interest paid = $295,479.00
Bills total home loan interest paid = $187,927.00
Difference = $107,552.00
The harsh reality is that Ted’s credit score cost him $107,000…But that’s not the actual tragedy of the story.. .The worst part is Bill and Ted were brothers and both had poor credit at the same time (years before buying their homes). The only variation was Bill took action to repair his credit, while Ted didn’t.
Now, ask yourself “Who got Teds’ $107,000 in extra interest payments?” ANSWER: The financial institution.
And that’s why banks love low credit scores. Customers like Ted are far more lucrative than customers like his brother Bill. All because a lower credit score means they have to shell out a higher interest rate and most people like Ted don’t see the big picture, as an alternative they only focus on…The month-to-month Payment they can afford.
Banks really like individuals like Ted simply because they make millions off them. Will you end up being like Ted and throwing away over $100,000 in interest payments on your home? Hopefully not…
Now that we’ve gone over why financial institutions love low credit scores… let’s talk about why Credit Bureaus appreciate them just as much (if not more).
If you ask 10 Americans on the street… “How do Credit Bureaus generate money?” You will invariably get the similar answer all 10 times: “By Selling Credit Reports of Course!”
While this answer is true, it’s not… the whole truth.
The actuality is that Credit Bureaus make the bulk of their income selling personal data, not running credit reports. In the illustration of Bill and Ted one doesn’t have to be smart to realize that Ted is a more worthwhile customer to the financial institution than Bill, simply because Ted has to pay a larger interest rate due to his credit score. This is simply because Ted is what’s known as…“A SUB-PRIME Borrower”
Since sub-prime borrowers are more lucrative customers due to the fact they pay increased interest rates, there is a thriving business for Credit Bureaus to sell lead data to Mortgage Lenders.
Remember, Credit bureaus make the BULK of their money NOT by promoting credit reports but by selling personal information. And, the only thing more worthwhile than selling personal data, is when you can sell that same personal information, over and over to, multiple clients. Let us wrap up with just 1 illustration…“TRIGGER Leads”
A while back the Credit Bureaus came up with an extremely worthwhile product to sell to mortgage brokers called “TRIGGER LEADS.” The finest way we like to explain a “Trigger Lead” to consumers, is to have them imagine they work at their local Sheriffs office answering the telephone.
Then, each and every time someone calls and gives their name, address and phone number in order to file a police report that their residence was just broken into… they then take that data and turn around and sell it as a “Lead” to 20 different “Home Security Companies” so they can get in touch with the recent victim about purchasing a security system for their home.
After all, you can’t come across a “Hotter Lead” for a home security system than a particular person whose just had their home robbed within the last 24 hours!
Trigger Leads essentially work the identical way except they’re sold to mortgage brokers. It works like this: Joe Consumer goes to his local bank or mortgage broker to get prequalified to purchase a home. As a result, the lender pulls his credit in the process.
The Credit Bureau see that Joe Consumer is shopping for a mortgage so they then sell his name, address and phone number to other mortgage brokers as a “Trigger Lead” within 24 hours, so they can call him and pitch him a better deal. Sound interesting? It gets better.
In a few cases the “Trigger Lead” will be sold 20 times in less than 24 hours. Shocked? Don’t be… not until you understand that “Trigger Leads” can cost around $5 each (or more depending on the data selects).
So let’s break down the numbers real fast. Joe Consumer gets his credit pulled in the procedure of “prequalifying” for a home mortgage. His individual info is then sold for $5 as a “Trigger Lead” to up to 20 various mortgage brokers within 24 hours. Simply math tells us that if twenty People Each Pay $5 for Joe’s Contact details…that’s $100 produced off Joe’s Name!
Now imagine how many “Joe’s” are generated just about every day by the Credit Bureaus? Selling sales prospects for homeowner loans and credit card offers is big business for the Credit Bureaus. How many other enterprises have a database of over 200 million names they can make cash off selling over and over? Now, imagine WHO is the most worthwhile “LEAD” they can sell?
A person with a high credit score? Or…A person with a very low credit score?
The answer is obvious. And, it also becomes obvious why the Credit Bureaus have automated so much of their consumer dispute processes overseas. It’s also the reason why the Credit Bureaus have shown no actual incentive to lower the number of harmful mistakes in consumer credit reports with enacting stricter data management. In the end “SUB-PRIME Borrowers” are more Desperate and more lucrative and that’s the reason why the Credit Bureaus love your very low credit score…and why they don’t desire you to work on credit repair.Credit, credit bureau, credit scores, loans, mortgage