As I recently noted in “A simple way to save $159k,” people with poor or nonexistent credit will feel the sting of higher interest rates. Specifically, they’ll pay an average of $159,464 more in interest over their lifetimes, according to Credit.com’s Lifetime Cost of Debt Calculator.
The number-crunchers over at Credit.com have now revealed the states with the highest and lowest lifetime credit costs. Alaska isn’t in either the top or bottom ten. However, the state of my birth, New Jersey, is home to the fourth-highest average lifetime cost of debt. Yay.
Short form: If you want to pay less, improve your credit score and then move to Iowa.
Residents of the Hawkeye State will pay $129,394 in lifetime interest. The other top nine states are Nebraska, Wisconsin, Maine, North Dakota, South Dakota, Montana, Pennsylvania, West Virginia and Vermont. For specifics, visit Credit.com’s state-by-state breakdown.
As for the states with the highest cost, the top one isn’t really a state. It’s Washington, D.C., where folks will pay $451,890. The other nine are California, Hawaii, New Jersey, New York, Maryland, Virginia, Washington, Massachusetts and Colorado. Again, if you want to see just how painful these amounts are, visit the state-by-state breakdown.
The two biggest variables are credit scores and mortgage size. In Iowa, the average score is 689 and the mortgage balance is a little over $120,000. But in our nation’s capital the numbers are 656 (considered “fair”) and $462,000.
Obviously averages can be misleading. If I’m in a room with Bill Gates and Warren Buffett, our “average” income doesn’t reflect reality.
Still, there’s enough that’s real about the Credit.com numbers to get my attention – and yours, too, I hope.
A harder and more expensive life
My “save $159k” article mentioned several other reasons to use at least some credit vs. relying solely on debit. I know that anti-credit crusaders will shoot me down for this, but refusing to use credit can put a real hurt on your finances.
You’ll likely (almost certainly) pay more in interest. In addition, a mediocre or rotten score can affect insurance rates and whether you can even get a car loan (and you don’t want dealer financing). It may also affect where you can rent and maybe even whether you’ll get a particular job.
Unfair? Yep. Reality? Oh, yes.
“Your life is going to be harder and more expensive if you refuse to use credit cards,” credit expert Liz Weston told me.
Try this analogy: Suppose you hate the other kind of plastic, too. You store your food in glass rather than Tupperware, buy only wooden or cloth toys for your kids, eat from china or pottery plates and drink from real glassware, bring your own reusable bags and go out of your way to buy products that don’t come in plastic bags or boxes.
That’s laudable. But do you also plan to refuse medical treatment that involves plastic IV tubing or disposable syringes? Or would you balance the benefit of the blood transfusion or tetanus shot against the infuriating reality of all that plastic going into the landfill?
(And it’s a lot of plastic. According to The New York Times, hospitals and health facilities produce several billion pounds of garbage annually, and a lot of that is plastic.)
Even if you dislike the credit scoring system, it’s what we have to work with right now. Not buying in, so to speak, is going to hurt you. Think of the opportunity cost of all that interest.
Related reading:
- Got a credit card? Get another one
- A look back (and forward) at credit
- Cards and consequences
- What’s the weirdest thing you ever charged?
Thanks for helping all of us to see that using credit is not an all-or-nothing deal! Moderation is the key.
As they say: Moderation in all things, including moderation. 😉
It’s a bit misleading, I think, because the numbers in that study are really skewed toward the cost of housing.
Not to say that having poor credit won’t cost you more – but you can have bad credit, and live in a location with cheap housing – and I bet you’ll still pay much less interest over your life, than someone like me, who has great credit, but lives in California where house prices are crazy.
Having great credit isn’t a guarantee that you won’t pay a lot in interest on things like housing. But that’s not the point. The takeaway is that if you have mediocre to zero credit you will pay more than you should. Someone who lives in Iowa and has lousy credit will pay more than his high-scoring neighbor.