Perfect Credit

The Story of Bill and Skip: Why Your Credit Score Matters

Here’s a tale about two 40-year old guys who are best friends. We’ll call them Bill and Skip.

From the time they were teenagers both Bill and Skip dreamed of becoming successful corporate sales executives and enjoying the finer things in life—you know, nice house, sporty cars, designer suits, the whole works. Bill and Skip attended the same college, and both graduated with business degrees and a 3.5 grade-point average.

They married around the same time, and each now has two kids of the same ages, 7 and 5. Since Bill and Skip are sports buffs, neither one smokes; in fact, the two of them are in great shape because they work out together every weekend at the local gym. Although Bill and Skip both work for the same Fortune 500 company, that’s where the similarities end.

You see, Bill always pays his bills on time. He’s made it a point in his life to handle his financial affairs responsibly. So he keeps his debts at manageable levels, always keeps up with his obligations, and safeguards his credit in every way he can.

In fact, he makes payments on his $400,000 mortgage ten days ahead of the due date. Skip, on the other hand, plays fast and loose with his finances. He skips Visa payments every now and then, sometimes just because he’s too busy to get stamps from the post office.

Because he’s on the road so much, Skip often forgets to mail his cell-phone payment when it’s due. “What’s the big deal if I pay it a couple days late?” Skip thinks. “They’re still going to get their money.” In addition, Skip has missed making his mortgage payment on time twice in the last year, once when he was on vacation and another time when he was traveling for a business conference. The same thing happened with his car payment for the Lexus he drives.

Unfortunately, Skip didn’t have automatic payments set up online to make those payments in his absence. “I can’t be bothered with that. Those things are too complicated, and besides I’m too busy,” he said when his wife suggested putting their bills on automatic payment plans to avoid those constant late fees.

Skip’s wife was tired of arguing with him about their money problems, so she just let it go. But when it came time for Bill and Skip to get loans and insurance, the wayward Skip was shocked at how much he had to pay. When the two friends compared notes, here’s what they found:

  • Mortgages—Although Bill and Skip both took out 30-year, fixed-rate mortgages for $400,000, Bill’s monthly payment is $2,300 a month while Skip’s is $2,800. Compared to Skip’s, Bill’s mortgage payments are $6,000 less per year, saving Bill $180,000 over the life of his loan.
  • Auto Loans—Both made equal down payments to finance their late-model Lexus automobiles, but Bill’s payment is $400 a month while Skip pays $550. By the time the cars are paid off in five years, Bill will have doled out $9,000 less than Skip. And since the average American family buys seven new cars in a lifetime, that $9,000 gets multiplied seven-fold for a total lifetime savings of $63,000.
  • Credit Cards—Bill and Skip are carrying $3,000 balances on their Visa credit cards. However, since Bill has perfect credit, his interest rate is just 8.9%; Skip’s is at the default rate of 28.99%. So Bill pays around $27 in monthly interest while Skip is hit with charges of $87 each month. In five years’ time Bill saves $3,600 in interest costs. At this rate, over the next 30 years, Bill will pay $108,000 less in finance charges.
  • Life Insurance—Both men bought $500,000 whole-life insurance policies. Bill’s costs him $320 a month or $3,840 yearly; Skip’s costs $410 a month or $4,920 annually. Over the course of 40 years, Bill will save $43,200 by paying $153,600 for insurance compared to $196,800 spent by Skip.
  • Auto Insurance—Though both own cars of an identical year, make, and model, Bill’s insurance costs $1,800 a year while Skip’s runs $2,340. Bill’s five-year savings on auto insurance is $2,700 ($9,000 paid by Bill versus $11,700 paid by Skip). Over 35 years Bill’s savings add up to $18,900.

A Promotion Won and Then Lost

All told, Bill saves at least $413,000 because of his lifetime of perfect credit. That’s nearly a half million dollars that Bill keeps in his bank account, simply for paying his bills on time and managing his credit wisely. But the financial benefits don’t end there.

Bill and Skip are also up for promotion to Senior Vice President of Sales. Even though they’re competing for the same position, they’re still buddies. Bill tossed his hat into the ring for promotion not knowing that Skip was going to go for it. When Bill found out that Skip was interested in the job, Bill thought about withdrawing his name. “The truth of the matter is that you are the better salesman,” Bill told Skip, adding that “Everyone knows you’re a shoe-in for the promotion because of your outstanding sales record. You deserve a promotion.”

As it turns out, the boss saw it that way too. After interviewing four candidates for the job, the boss picked Skip. But because the job paid $100,000 annually, the human resources department performed its customary background check, running Skip’s credit report in the process. Within 24 hours Skip’s promotion had been rescinded. The high-paying job ultimately went to Bill, who received a $25,000 raise. Neither guy thought it was fair, but as Skip’s boss said upon withdrawing the promotion, “Hey, it’s nothing personal. It’s just business.”

Apparently the company figured that bad credit meant that Skip wouldn’t be as trustworthy and might be tempted to steal customer funds if his own money problems worsened. Skip went home seething mad. He consulted a lawyer to see whether his boss could legally offer him a job and then take it back because of Skip’s bad credit. The attorney advised Skip that unfortunately what the employer had done was perfectly legal. When Bill went home, he was ecstatic.

He did the math and realized that over the next 25 years the extra $25,000 in salary meant he would generate $625,000 in additional income before retirement, not including any other raises. As you can see, paying his bills as agreed allowed Bill to save and earn a total of $1,038,100 more than poor Skip, who continued to skip payments and wound up constantly penalized for his lousy, bad credit.

Excerpted from Perfect Credit:  7 Steps to a Great Credit Rating

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