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If the recession has taught us anything, it's that people of all ages are sorely lacking in basic financial literacy skills.
Now a new study, called Americans' Financial Capability, highlights how adults in the U.S. are especially ignorant about matters concerning credit and debt.
See also: Dispute mistakes on your credit report.
The National Bureau of Economic Research, which issued the study, found, among other things, that many people mishandle credit cards and debt to such a great extent that higher interest payments and fees routinely penalize them.
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Case in point: Some of the 1,500 Americans polled by the Bureau didn't even know the interest rates they pay on their credit cards or mortgages. Others made late payments on credit accounts and suffered consequences such as late fees, penalty or "default" interest rates, and ruined credit records.
It's one thing to be a novice when it comes to sophisticated investing strategies, complex tax laws or arcane estate planning rules. Those areas frequently require detailed financial knowledge or specialty advice from an educated, experienced professional.
But mastering your credit doesn't require an MBA. On the contrary, it's an area that each of us can conquer with a bit of time, effort and study. If you're not willing to educate yourself about credit issues, that's like throwing money down the drain. After all, it's careless to be clueless about your credit rating, because bad credit can cost you money — lots of it.
A Million Dollar Credit Rating
In my book, Perfect Credit, I calculated that an individual with terrific credit would save or earn over his or her lifetime $1 million more than someone with bad credit.
How is this possible?
It all boils down to all the financial transactions you'll likely make over a lifetime, as well as the areas of your life where your credit rating plays a crucial role.
Let's start with the loans and credit you'll apply for.
Think about the credit cards, mortgages, business loans, auto loans or student loans for which you've applied or might co-sign for in future years.
When you have bad credit, you'll have to pay an exorbitant amount of money in interest and finances charges — that is, if you get approved for a loan at all.
As of July 2011, for example, a person with a FICO credit score of 760 or higher who qualifies for a $300,000 mortgage can expect to get that loan at a rate of 4.3 percent. This borrower's monthly payment will be $1,485, according to data from Bankrate.com.
Now contrast that with someone who has shaky credit and a 620 FICO score. This individual will only qualify for a $300,000 mortgage at an interest rate of 5.9 percent. That translates into a $1,779 monthly payment. Each year, the second borrower will fork over an extra $3,528 to the bank. And over the life of a 30-year loan, the person with bad credit will shell out $106,126 more in interest alone.
Make the same calculations for all other credit obligations you might take on, and it's easy to see that bad credit can cost you dearly when you need to secure a loan or credit.
Excellent Credit Helps You Save or Earn Money