it almost seems like the world of loans and mortgages are
over-complicated on purpose - and that's a valid, debatable
regardless, you need to know what you're getting into - and
if you're navigating through your first major loan or mortgage,
then this is an essential starting guide to read, study and
can think of credit in many different ways, but at its core
I would define it as the level of confidence and trust
a lender places in a borrower ability to repay back monies
lent to that borrower. Now, the more confidence the
lender has in the borrower, the lower the interest rate the
borrower will be charged. On the flip side, as the lenders
confidence in the borrower decreases the interest rate that
is ultimately charged increases. This is the golden rule of
credit, one which 99.9% of lenders base their decisions on.
Do We Need Credit?
credit very few of us would ever be able to acquire any major
assets such as houses and cars. Credit allows us the privilege
of being able to fully utilize and enjoy the full use of the
item we have purchased prior to owing it outright. If everyone
was suddenly forced to pay cash for everything the economy
as we know it would come to a complete stand still. Now dont
get me wrong Im not saying you should charge everything,
on the contrary, in my opinion credit should be reserved for
the purchase of significant items, such as houses & cars.
Keep in mind cash forces us to live within our means
and credit for some allows them to live to the extreme.
Are We Doing With Credit?
not so hot! There has never been a time in history when both
as a nation and citizens have we been more indebted. There
are very few out there who have any savings to speak of. Credit
can be a wonderful tool in helping build wealth if used wisely;
in fact its the use of credit by many entrepreneurs
throughout our history that has created tremendous wealth
for them. Too few of us today however today are carrying good
debt most of us are only carrying bad debt.
The difference between these two is that good debt helps you
prosper while bad debt sets you back.
Do Banks and Financial Institutions Actually Work?
they start out by taking money from depositors (this can be
in the form of savings accounts, term deposits, etc) and for
doing so they agree to pay us interest on those deposits.
Of course the bank has to find a way to pay for the interest
that theyve promised us and they do this by loaning
out our money on deposit to qualified borrowers at a higher
rate than the one theyre paying you and me. The financial
institution generates a profit from the difference, this is
known as getting a spread.
in some cases the financial institution is also able to leverage
against these deposits on a greater than one to one margin.
In essence they are able to borrow many times the value of
these deposits and lend out this money to make more money
and spread. This practice was one of the contributing factors
in the recent global financial crisis.
Should I Borrow For and Not Borrow For?
I mentioned that there is such a thing as good debt examples
of this would be borrowing for a home. As a general rule,
a home makes a good long term investment plus of course it
provides much needed shelter for you and your family. Borrowing
to enhance your education would also make a lot of sense provided
what youre studying for is in demand by employers and
increases your value to them. A car loan can be looked at
either way, of course you need a reliable vehicle to get you
back and forth to work and for daily living but going hog
wild and buying a Hummer may not be the best decision
financially. As a general rule, for day to day items such
as, food, utility bills, car insurance, cable etc, get in
the habit of paying cash these are not good debts.
Do I Know What I Can Afford Per Month?
The first step to take before going out and taking on a new
monthly obligation is to get a handle on the ones you already
have. This is done by preparing a household budget, if you
dont have a clue on how to go about doing this visit
your local financial institution, find the nearest credit
counselling agency or go online, any one of these can point
you in the right direction. If you arent sure you can
afford a new monthly loan payment, try taking it for a test
youve ever been shopping for a car at a car dealer youll
know that you get a chance to take the car you like for a
test drive prior to ever committing to buy it.
Well you can do the same with the loan youre thinking
of taking on. Calculate what the monthly payments would run
you then setup a separate account and each and every month
for a few months on a predetermined date pay yourself the
payment into this new account. Now if after a while you find
yourself dipping into that account then more than likely you
probably cannot afford the loan. You can do this with loans
that are big or small, it doesnt matter if its
for a car or a house, at the end of the day it will help you
avoid a lot of stress and grief plus its an excellent
way of saving for a down payment.
Does Borrowing Really Cost Me?
I mentioned that lenders generally charge higher interest
rates for loans that pose more risk, but what does this actually
mean in terms of dollars and cents. Well lets take a
look at the following example.
say you borrowed $200,000 for 35 years, in one example Ill
use 5% and in the other 6%, now I know a lot of you are thinking
what difference could 1% possibly make.
prepared to be shocked:
mortgage for 35 years at 5%
Total interest paid = $211,193.69 (total cost of home $421,193.69)
$200,000 mortgage for 35 years at 6%
Total interest paid = $274,815.44 (total cost of home $474,815.44)
1% difference results in total Savings of $53,621.75
could you do with an extra $53,621.75? Im sure all of
us can come us with better uses for it than paying it in interest.)
can I do to Build My Credit so I can Qualify for the Lowest
with baby steps; begin establishing your credit with small
manageable loans and or credit card accounts. Be careful and
dont fall into the same trap that most good meaning
consumers do that is the one of actually worsening their overall
financial situation by taking on too much too fast. These
folks figure if a few credit accounts are good for their rating,
than a lot will do wonders for it. This is a recipe for disaster
as having so much available credit so quickly can be quite
a temptation to those who have yet to learn the mastering
in mind also that cell phone providers and common utility
providers dont generally report to the credit bureau
that is up until you miss a payment, so even though you made
59 on time the 60th one you missed is the one that the lenders
will see. So make certain that the lender youre getting
the starter loan or credit card from reports to the credit
bureau each month. Now dont forget to do what any wise
consumer would do, keep in mind that terms and conditions
can vary vastly from lender to lender. Its up to you
to review the interest rate, fees, and penalties that may
apply from lender to lender and of course and do as much comparison
shopping as possible, its your money!
addition its a good idea not to acquire more than one
credit card in any 6 month period, and once you have 3 or
4 cards within an 18 to 24 month, you need to stop acquiring
cards. Most folks will not need anymore than 3-4 any more
and youre asking for trouble both in the way of temptation
to yourself and a nightmare if youre wallet or purse
is stolen. Also when lenders see that youre acquiring
a litany of new cards, they look less favourably on your loan
request as you now have the potential of accumulating a whole
bunch of new debt very rapidly.
way of establishing credit is to have someone with an established
credit rating and history co-sign for your initial loan or
credit card. When a friend or family member does co-sign a
debt for you, it now means the loan will report on their credit
and they are dually responsible for the repayment. So whatever
you do, dont let them down as any screw ups on your
part will also impact their credit rating.
lets recap, first, never, never, never miss a monthly
payment. Second, always pay on or preferably before the due
date. Some cards consider you to be in default if you are
one day late- causing you to pay a higher interest rates,
and fees. Also with many credit card companies there is a
30 day grace period on interest, so if you pay youre
balance in full month to month you will never incur any interest).
Lastly, dont charge or borrow more than you can payoff
each month. If you take the steps weve discussed here,
they will help begin and establish your credit rating. Always
remember that credit is a privilege not a right, and if you
neglect to take care of your finances, its a privilege
you will both quickly lose and or wind up paying exorbitant
can I do to Repair Past Credit Problems?
most of us tend only to learn by making mistakes. For many
consumers, thisholds especially true when it comes to credit.
If you truly want to correct your past or current credit problems,
its really quite simple, you have to change your everyday
spending and money management habits.
you need to ask yourself, how did I get into this mess? What
habits or choices caused me to manage my money so poorly?
If you need help determining these answers, talk to a friend
or family member who is good at managing money, or get in
touch with a credit counselling service there are many resources
to help you get these answers. The key is to get pointed in
the right direction.
starting down the road of credit repair, dont make the
same mistake so many make thats making temporary fixes
instead of addressing the root problem. Root problems such
as poor spending habits, reckless and impulsive decisions,
failure to make and or stick to a budget of any kind. Borrowing
more money to help dig out of borrowing money in the first
place which may solve things in the short run but only makes
the situation worse in the long run.
closing its critical that you recognize that the process
of rebuilding your credit will take some time and a lot of
sacrifice depending on the severity of your situation. Only
when you get a complete understanding of your individual situation,
will you be able to take the next step. Thats implementing
a budget and finding ways to change your spending habits daily
so that youre able to live within your budget and means.
This is the only road to financial freedom, and if youre
truly committed to changing there is no past financial obstacle
you cant truly overcome.