The days of women relying on a husband or partner to take care of the finances are over.
“At one point, 99% of women are going to be living on their own whether straight out of college, through divorce or through death because women live longer,” says Cary Carbonaro, author of, “The Money Queen’s Guide” and Certified Financial Planner at United Capital, “and they must learn to manage their own finances and their own credit.”
So, it was with a sinking feeling that I read the results of the latest Credit Sesame internal data, taken from a subset of our 7 million members that showed that women earned less money and had lower credit scores than men.
Women definitely have lower credit scores than men
The Credit Sesame data shows men had an average credit score of 630 and women had an average credit score of 621 towards the end of 2015. You might think that 9-point difference in credit scores is no big deal.
“The way credit works, the rich get richer and the poor get poorer,” says Carbonaro. “The wealthy, who are more likely to have a good credit score pay less for a loan but if you have money troubles and a poor credit score, you’re going to pay significantly more because of the higher interest rates you are offered.”
What this lower credit score means for women
A 9-point difference could be the difference between super prime credit (781-850) and prime credit (661-780) so you’d miss out on the very best deals and interest rates when borrowing money.
[Related: Moving From Subprime to Prime Credit Means Getting More House For Your Money]
Even worse, 9 points can be the difference between nonprime credit (601-660) and prime credit (661-780) which means you will be penalized by much higher interest rates for every type of loan.
According to 2015 Experian auto loan data, the average interest rate for a prime new auto loan was 3.67% and 10.96% for a subprime new auto loan. Subprime auto loans were also longer in duration at 72 months compared to 60 months for prime auto loans (to reduce monthly payments) which can result in thousands of dollars difference paid toward a car loan.
On a mortgage, that can amount to hundreds of thousands of dollars in interest over the 30-year term of a mortgage loan.
Carbonaro tells the story of a current client who is paying an interest rate of 6.5% on her mortgage loan. “At current rates, she is overpaying by 2.5%. And, she is underwater on her mortgage so she can’t refinance and so she is stuck overpaying massively. This is making her monthly bills difficult and eating into her retirement in a very serious way.”
Women have lower incomes than men, which hurts their credit
When the United States Federal Government released its 2015 wage gap statistics, it showed that American women earned 78 cents for every dollar a man earned and that the figure has hovered between 76 cents to 78 cents since 2001.
I asked Carbonaro why this is still happening when women hold just about half (49.3%) of all jobs in this country.
“Nobody starts out saying they are going to purposely pay a woman less. But a number of very real factors play against women in the workforce that do not affect men,” she explains.
The first is that women do not negotiate hard for themselves when it comes to salary, benefits and perks at their job.
“Women are perceived well when negotiating for clients, business partners or in making deals. But, women are seen as aggressive, demanding and ‘not nice’ when negotiating their own salaries,” says Carbonaro, citing a 2014 Harvard Business Review article which analyzed published studies on working adults and negotiations.
Why don’t women negotiate for more pay?
Two other very real factors may reduce a woman’s will to negotiate for herself and employers’ paying women less. One is women are possibly out of the workforce more time than men because of childbirth and caregiving for a child or parents. And, because of these family responsibilities, women tend to work less hours in the office than men, explains Carbonaro.
“It’s a definite gender bias both men and women have that hurts women in negotiating their salaries,” asserts Carbonaro. “And, when women don’t have the same level of income it also hurts their credit because their debt-to-income ratio (DTI) is automatically higher so they are offered lower credit card limits, lower mortgages and lower auto loans all at higher interest rates.”
Your DTI is the difference between what you earn and what you pay toward debt including your mortgage and all your debt payments. Carbonaro likes to see a healthy total DTI of around 36% at the highest.
When credit limits are lower it also causes credit utilization, or the amount of credit used compared to the amount of credit extended, to rise which hurts women’s credit scores. The Credit Sesame data also found this to be true, with women’s credit utilization at 21% and men’s at 19% when their average balance differed by only $230.
Credit Sesame internal statistics show that those with credit utilization under 15% have the very best credit scores.
Carbonaro says women need to protect themselves from a poor credit score every way they can and work towards raising their score to the next highest level. That means paying all their bills on time, paying down credit card debt (while keeping the accounts open) and definitely negotiating for higher salaries this year. And, if you think you’re going nowhere at your current job, that means negotiating for a higher salary at a new job.
