Beating Broke

Personal Finance from the Broke Perspective

The Building Credit Fallacy

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Building credit is a phrase that you’ll see around the Internet and anywhere most financial experts talk.  It’s basically the act of getting a loan with easily repayable terms, or piggybacking on someones loan, in order to create a positive record on your credit report and thus increasing (building) your credit score.

But, for many, it’s a fallacy that acts as another trap in the debt cycle.  Here’s the scenario.  You need to build your credit.  So, on the advice of a few friends or experts, you go down to the bank and get a $300 loan.  It’s all they’ll give you, and the interest rate is way more than you should spend.  But, you don’t plan on spending any of the money, so you’ve just got to come up with the payments with the added interest and viola! A shiny new positive mark on your credit report.  Except.  Except that after about 2 months, you get a flat tire.  Or you’re favorite band comes to town.  Or your friends want to go out on the town.  Something comes up and you need some money.  You don’t have any.

credit reportWhere do you get your money?  Why from the loan, of course.  You’re gonna pay it off anyways, right.  So, you’ll just have to scrape together a bit more for the next payment, that’s all.  Except.  Except, you don’t scrape together that money.  You use the rest of the funds to pay the next few months payments, but you come up short.  You still need to scrape a few dollars together to make the last few payments.  How’d this happen?!?  It must have been those parasitic lenders, right?

Not quite.  You did it to your self.  And instead of a shiny new positive mark on your credit report, now you’ve got new delinquencies.  And eventually, maybe a nice new collection note.  All because you thought it would be nice and easy to build your credit.  You fell victim to the fallacy.

It doesn’t have to be that way.  Many people pull this off, but it takes a mindset as well as the money.  If you attempt to do something like this, but you don’t have your whole mind in it, you stand a high risk of ending up with negative marks instead of positive ones.  But, if you’re determined to stay out of debt at whatever cost, you can make it work.  It means you can’t touch that money for anything.  No drinking with friends, no Bieber concert, and no new tires.  If you want to improve your credit score, and you’re in a situation where this is the only solution, you’ve got to be ready to make a few sacrifices.

Take a step in the right direction, take responsibility for your actions, and do the financially sound thing.  Building your credit can be that easy.  It’s not a easy task, but once you’ve built it long enough and high enough, maybe you can continue to build it with a nice used car loan of a couple thousand.

Image Credit: credit report by TheTruthAbout…, on Flickr

The Skinny On: Credit Cards

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Get The Skinny on Credit CardsThe Skinny On: Credit Cards

By Jim Randel

I’m sure a few of you have heard of this series of books by Jim Randel.  He was kind enough to send a few of them my way for review purposes.  <– That’s my way of disclaiming that I was given these books specifically for review.  My review remains honest, but the FCC says you gotta know that.  The first book that I decided to review was the Credit Cards one.  Seemed like a good topic to cover here and if the book was valuable to you, then it would be even better.

The Skinny On books are a somewhat novel idea.  They are put into a narrative and the narrative is given to you by stick figures in a layout that is reminiscent of a comic book.  The language used is simple and easy to read and understand.  Any jargon is explained, either with a definition or a short dialogue.  And, they’re short books.  This one is one of the larger ones and it’s only about 160 pages.  A quick read to be sure.

The content is incredible.  In less than 200 pages, Randel was able to give the basics (and even a few not so basics) on getting and using credit cards as well as the effect they have on your credit score.  He takes several pages to discuss paying off cards for those who are already in trouble.  The books remind me a little of Cliffs Notes.  All the highlights and none of the filler.  Well, except for a terrible joke about a guy with bananas in his ears.  😉

The one downside to these books is their size and format.  It’s not even really a downside, but I think that some might discount the books because of their size and format.  Which would be a mistake, but it could happen.  Overall, the book is well thought out and put together.  The information is up to date and well given.  This would be an excellent book for a teen or a less personal finance savvy person.  I did get a few things out of it, however, so give it a quick read before you gift it.

You can buy the book directly from theskinnyon.com or at Amazon.

Using 0% Interest Rate Credit Cards

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The introductory and balance transfer 0% interest rates on some credit cards can be a very enticing benefit. The fact that we see it offered so often proves that it works as a marketing ploy for the credit card companies. Some people take advantage of the offers and do what they call “0% rate arbitrage”. They take the CC company up on their offer and then pull the money out as cash and dump it into a interest bearing account where they can make several percent on the money. It’s like free money. But are the offers worth using if you’re like me and just want to be debt free and live a financially responsible life?

The answer is not a straight yes or no answer. In fact, it isn’t really even a straight “maybe” answer. Much like most financial products, it is very dependent on your personal situation. Make no bones about it, I dislike credit cards. If I can, I will be credit card free some day and use only my debit cards. However, until that day happens, I’m stuck with them. I don’t use them, but merely pay them off. Until they are paid off, I’ve still got a few.

While I have no intention of ever trying the arbitrage that some people try, I have and will use the 0% offers to help with my debt repayment. It’s a free loan. Sure, the rate is temporary, and the rate on expiration is likely just as bad as the card I transferred from. But, for that introductory period, I pay no interest, and every penny that I send as a payment goes towards paying off that balance. Essentially, I’m making 8%, 9%, and in some cases 20+% on my money. The offers can be a great tool while you are repaying your debt.

Once you are done repaying your debt, however, credit cards have little to no use to you. The concept is that a credit card is a way for you to have a open line of credit whereby you can access your “credit” anytime you want from virtually anywhere. However, if you are a financially responsible person and maintain a debt free lifestyle, you’ll likely want to pay cash for nearly everything. Obviously, a debit card or good ol’ cold hard cash is your tool of choice.

One exception that could be argued for is reward cards. These are cards that give you rewards based on the amount of money you spend using your card. If you are responsible and pay off your balance within your grace period, you can make a pretty good argument for the use of a reward card for the sake of the rewards. And some of the rewards can be quite tempting. Airline miles, gas discounts, gift cards, and even cars are among the lists of rewards.

Some folks (like Ramit of I will teach you to be Rich) think that the reward cards are a horrible thing. The possibility of missing a payment or letting your spending get out of control is always there and one slip up can cost you well more than any reward you might get. And unnecessary risk is something you don’t want in your financial life.

Back to the 0% cards though. The bottom line is that if you are already using some self control and not using your cards, transferring the balance to a 0% offer can save you quite a bit of money over those few months that the rate is that low. If you can’t manage the cards you have, though, forget it. The risk of causing more harm to yourself is too great to add more accounts to your portfolio. Also, don’t let a great introductory/transfer rate buffalo you into signing up for what would otherwise be a horrible card. Do your due diligence and read the fine print for annual fees, grace period, other fees, and most importantly the normal rate. I’ve seen several of these offers that are great, until the offer is over and then you’re hit with a 29.99% rate. Obviously, the extra savings of the low rate wouldn’t outweigh the normal rate if you’re transferring a balance from a card that only had a 8.9% rate!

Be careful. Learn what you can and make as educated of a choice as you possibly can. I don’t condone using credit cards because I know first hand the damage they can do to a persons financial life, but I recognize that these offers can be a very valuable tool for the responsible few who have learned to handle their money properly.