Q&A of the Day – How Much is Good Credit & Financial Literacy Worth?
Each day I feature a listener question sent by one of these methods.
Email: brianmudd@iheartmedia.com
Social: @brianmuddradio
iHeartRadio: Use the Talkback feature – the microphone button on our station page in the iHeart app.
Today’s entry: Brian, sometime ago I seem to recall you having discussed what the value of maintaining good credit was over the course of a lifetime (or something to that effect). I’m asking because I’m currently working on financial education with my soon-to-be 18-year-old son, who listens to you as well, btw. Thanks!
Bottom Line: I love hearing this...thank you and your son! Financial literacy, or the lack thereof, is one of the costliest issues in society today. And it’s a problem for most of our society. According to the annual TIAA Institiute Personal Finance study, only 48% of adults are currently financially literate. This includes only 38% of adults understanding the basics of investing, only 39% understanding insurance, and only 44% understanding the basics of earning income and taxation. That one has enormous implications over one’s life, including often politically. For example, it’s easy for politicians to manipulate voters who don’t understand how earnings and taxation work.
Before diving into the implications specifically for credit, here’s an idea of what the impact of overall financial literacy means to the average person in this country. Financially literate people:
- Earn more
- Invest more
- Produce better investment returns
- Maintain a net worth that’s 2.5 times higher
And those are just the averages. So, in other words, financial literacy will result in the average adult being worth 250% more than they otherwise would be with all other factors being equal. That’s the best way I can think of to illustrate the importance of financial literacy at any age, but especially early. As for the credit specific question...
I want to boil this analysis down as much as possible because it’s easy to get carried away with a bunch of numbers quickly. Generally speaking, credit impacts just about every aspect of one’s financial life. From access to products and services, to what you have to pay for those products and services. For the purpose of this exercise, I broke out the average costs for these aspects of life: Housing, transportation, credit, insurance, utilities (including wireless service).
Here’s what the breakout looks like:
Total lifetime costs into today’s dollars for the total interest expense for the average mortgage, auto loan, credit card, auto insurance, homeowners' insurance and utilities...
- 600 Credit Score: $787,376
- 700 Credit Score: $705,067
- 800 Credit Score: $639,946
So aside from perhaps not always having access to all the products and services one may want, the difference between a “poor” credit score of 600 and a “good” credit score of 700 is $82,309 on average. The difference between a “good” credit score of 700 and an excellent credit score of 800 is an additional $65,121. This also means the difference between a poor credit score and an excellent credit score is $147,430.
The average full-time income in Florida is currently $60,850. This means that the average Floridian with poor credit must work an additional 2.5 years to simply account for added expense compared with someone who has excellent credit. And that’s not factoring into the conversation the opportunity cost associated with that money...for example how much could be accrued through investing the money saved on interest expenses with excellent credit.
Hopefully this is helpful and motivational.