Bad Credit is Expensive, Many People in America Have Bad Credit, Many at No Fault of their Own

For car loans, someone with a credit score of between 680 and 739 will likely pay 4.5% APR on their loans, compared to only 3.2% for people with scores above the 740 threshold. Meanwhile, people with sub-680 scores can pay anywhere from 6.5% to 12.9% APR for the same loan.

Over the course of a five-year loan for $10,000, that 4.5% interest rate results in an extra $5.85/month on the monthly payment and about $351 more over the life of the loan.

That may not be too huge a difference, but for people at the top end of the subprime auto loan market will pay an additional $46/month, which adds up to an additional $2760 over the five years.

This might be of little concern to you, if you have great credit, but sub-680 auto loans make up nearly half of new car loans, so that means there are a lot of people out there paying oodles of extra interest.

When it comes to credit cards, the difference is even more pronounced. Card holders with scores above 720 pay 12.9% APR on average, but those with scores ranging from 660 to 719 pay 17.1%. For people with scores between 620 and 659, that average is 20.3%.

So if you have two people each paying down a $5,000 credit card bill at $150/month, the person with 12.9% APR pays $1,235 in interest while the person with 20.3% APR will pay almost double that — $2,421 — in interest.

Not everyone comes from a wealthy, educated family with a safety net to build on and do things the “right” way.

There are 2 main reasons that those who come from a wealthy background have an advantage over those who come from a background of poverty. First, Those that come from a wealthier background tend to have some level of a safety net of support (even if their parents don’t pay their bills). Second, they tend to have better attitudes about money and wealth building than their poorer counterparts because their parents inevitably have better attitudes about money than the poor parents do. Robert Kiyosaki has made a killing on his book Rich Dad/Poor Dad which explains exactly this (and teaches people that didn’t have wealthy parents growing up how to think about money in a better way).

As a young adult supporting yourself though employment, you’re single and probably scraping by with little extra on an entry level income. If you blow a tire on the side of the road, assuming you have a stable history, it’s probably not a big deal. You might have a jack and spare or donut and you limp home or to a tire shop and get a new tire. You might even call AAA, or your parents to come help depending on your situation. It’s not going to ruin your life.

If you come from a low income background and your tire blows on the side of the highway it could send your life up in flames. It’s often a luxury for those of a low income background to be able to afford enough extra in their budget to pay for contingency items like a spare tire, or donut or even AAA membership. Often times when people are struggling to pay their utilities and going without food for the day to make sure the power stays on, it’s just not an option. Survival for the next day is just more important than planning for worst case scenarios or things that might happened that haven’t yet. If you don’t have the money in your budget for a spare tire (I know for many years I didn’t, I didn’t even have car insurance a lot BECAUSE it came down to paying insurance or gas to get to work and work meant that I had a roof over my head because if I lost that too, I had no family to turn to that I could move in with as a worst case scenario, this is reality for a lot of people) then you can’t afford to have your car towed either and it gets impounded because you left in on the highway. If you are like a lot of low income people, you live in areas that have poor access to public transportation so even if you can continue going to work it might be 6 months down the road before you can afford to get a new tire on that vehicle or you might need to take out a payday loan and start that vicious cycle of each paycheck being gone before you get it and paying extremely high interest on your own money each week. If you can’t afford to get a tire right away and the car does get impounded (has happened to me) then you will probably owe the impound lot more than $2000 after only the first 2 weeks. That’s likely more than you paid for the car in the first place and far more than its worth. It’s also likely around the time you get paid next and have any remote chance of affording to fix it and it’s already too late. Now you have to figure out how to keep getting to your job without transportation and on top of that figure out what windfall might come your way so that you can get another cheap car. I’ve known many individuals who have to wait until tax time to replace their vehicles and have lost jobs, kids, and watched their lives go up in flames over expenses that could be easily afforded if someone in their lives could have loaned them $50-100. An individual with a better credit score might have been able to save money for an emergency fund easier than someone who is paying for everyday debt like a car loan or mortgage, or they may just get a line of credit through a car repair shop and make a small monthly payment on any large unexpected repairs.

It’s more common than you think.

Medical bills and Student Loans make up the largest percentage of debt claimed in Bankruptcy. We aren’t talking about consumer debt, we are talking about life debt. Debt to live, and student loans can’t be discharged in bankruptcy under most circumstances.

Nearly 70% of bachelor’s degree recipients leave school with debt, according to the White House, and that could have major consequences for the economy. Research indicates that the $1.2 trillion in student loan debt may be preventing Americans,from making the kinds of big purchases that drive economic growth, like house and cars, and reaching other milestones, such as having the ability to save for retirement or move out of mom and dad’s basement.

Over the past few decades a variety of factors coalesced to make student debt an almost-universal American experience. For one, state investment in higher education dwindled and colleges made up the difference by raising tuition. At the same time, financial aid hasn’t kept up with tuition growth. In the 1980s, the maximum Pell Grant — the money the federal money gives to low-income students to attend college — covered more than half the cost of a four-year public school, according to The Institute for College Access and Success, a think tank focused on college affordability. Now, it covers less than one-third the cost. 

A college degree has also become more necessary than ever to compete in today’s workforce at the same time that Americans’ wages have remained stagnant. That means more students are going to school with less money to pay for it, resulting in an uptick in student debt.

The boom in for-profit college enrollment during the Great Recession has also served to boost aggregate levels of student debt and student loan defaults. For-profit colleges have come under scrutiny from lawmakers and consumer advocates who accuse them of using inflated job placement and graduation rates to lure students into enrolling and taking on loans.

A September study published by the Brookings Institution found that a large share of the growth in the number of students struggling to pay off their loans over the past several years is tied to students borrowing to go to for-profit schools and to a smaller extent two-year community college.

Other, factors likely also play a role in the growth of student debt. Many have blamed the uptick in college costs and therefore student debt on administrative bloat, the idea that colleges are spending more on nonacademic staff and facilities. In addition, many 17-year-olds likely don’t understand what owing tens of thousands of dollars in loans will mean after they graduate.

“What a lot of students don’t understand is that student debt is an investment in your future,” John Petellier, the head of the Center for Financial Literacy and one of the panelists, said in a separate interview. “A perfect example of what I think is missing at a lot of high schools is one of the key topics in financial literacy, understanding the connection between career and income.” A better sense of that relationship could help students make more informed decisions about whether a college or career path is worth the debt, he said. 

Even though we’ve gotten to the point where a large share of Americans have a personal connection to student debt, the experience is felt differently by different people. For one, though it might seem counterintuitive, borrowers with smaller debts are actually more likely to struggle with their student loans than borrowers with large balances. 

That’s because a small debt may be a sign that the borrower didn’t complete school or obtained a low-level degree that’s relatively meaningless in the job market. Borrowers with high levels of debt are more likely to have taken on loans to attend graduate school that will pay off in the labor market, allowing them to earn enough to pay off their loans. Just 3% of borrowers with a graduate degree defaulted on their student debts, according to the Federal Reserve Board of Governors. 

Borrowers’ experience with debt also varies by race and gender. African-American borrowers are more likely to take on loans for college and tend to borrow more, largely because the historical gap in wealth between black and white households means that black students have fewer resources to draw to pay for school. And because women earn less than men on average, they have less money to draw from to pay back their student loans.

Stagnant wage growth also plays a role.

Student loans can also have different consequences depending on age. While the debts may prevent younger borrowers from buying a home, a car or reaching other economic milestones, older borrowers are at risk of losing their retirement benefits. About 36,000 Americans lost a portion of their Social Security check in 2013 due to an unpaid federal student loan, according to the Government Accountability Office. –http://www.marketwatch.com/story/americas-growing-student-loan-debt-crisis-2016-01-15

Many states did not expand Medicaid leaving LARGE gaps in eligibility and coverage while the Affordable Care Act continues to fall short on its promises. Many working class American’s lost their Health Insurance plans or their plans costs sky rocketed. Many who were formerly uninsured or underinsured, even if they are now covered, have unpaid bills from before. Often times, for lower income Americans, paying the fine for not carrying insurance or having it deducted from your tax refund is far cheaper than paying for insurance.

Overall, about a quarter (26 percent) of U.S. adults ages 18-64 say they or someone in their household had problems paying or an inability to pay medical bills in the past 12 months. Though certain groups are more likely than others to report such problems, the survey finds that people from all walks of life can and do experience difficulty paying medical bills.

Insurance status has a strong association with medical bill difficulties, with over half (53 percent) of the uninsured saying they had problems paying household medical bills in the past year. However, as previous surveys have shown, insurance is not a panacea against these problems. Roughly one in five of those with health insurance through an employer (19 percent), Medicaid (18 percent), or purchased on their own (22 percent) also report problems paying medical bills. In fact, overall among all people with household medical bill problems, more than six in ten (62 percent) say the person who incurred the bills was covered by health insurance, while a third (34 percent) say that person was uninsured. Among those with private insurance (either through an employer or self-purchased), their plan’s deductible makes a difference in ability to afford health care bills, with those in higher deductible plans more likely to report medical bill problems than those in plans with lower deductibles1 (26 percent versus 15 percent).

Not surprisingly, problems paying medical bills are also more common among those with lower or moderate incomes. Just under four in ten (37 percent) of those with annual household incomes below $50,000 report experiencing such problems, compared with about a quarter (26 percent) of those with moderate incomes between $50,000 and $100,000, and 14 percent of those in the highest income category.2 Those with poorer health status and greater health needs are also more likely to report facing medical bill problems. This is true among those who say they have a disability that prevents them from participating fully in daily activities (47 percent report problems versus 22 percent of those without such a disability), among those who rate their own health as fair or poor (45 percent versus 22 percent of those in excellent, very good, or good health), and among those who say they’re receiving regular or ongoing medical treatment for a chronic condition (34 percent versus 23 percent of those who are not receiving such treatment). –http://kff.org/report-section/the-burden-of-medical-debt-section-1-who-has-medical-bill-problems-and-what-are-the-contributing-factors/

What is the solution? The necessity of credit isn’t going anywhere. What can we do to help honest American’s who want to better their standing but honestly can’t afford to go through years of bankruptcy and credit repair to be able to afford to save money on the things that their credit-worthy peers have never had to worry about. The system is broken. A step we can take is to offer alternative solutions to give people with bad credit access to credit at better rates by using other data than an individual’s FICO score to measure credit-worthiness while offering alternative lending solutions.

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