Credit Score — 8/10 — Beating Broke

A World of Cash Only

December 17, 2010 By Shane Ede 11 Comments

What if you couldn’t use a credit card. What if you couldn’t get a loan? Imagine a world where “credit” as we know it no longer exists. Or never existed in the first place. Would that world be better or worse than what we live in now?

In many ways, credit that is used wisely can be a benefit to our lives. It allows us to get a house without having hundreds of thousands of dollars in cash available. It allows us a car without having to have tens of thousands available. I know, if you purchase smartly and within your means, you don’t need hundreds of thousands of dollars for a house and you don’t need tens of thousands for a car. But, for those that feel that they can afford to pay those payments, credit makes it all possible.

What would a world where there was no credit look like? Instead of spending our last dollar to pay off the loans we get with our credit, we’d spend more of our time working for fulfillment. If we didn’t have the ready cash available to pay for something, we’d have to save for it. Or trade for it. And we’d do more for ourselves. We’d mow our own lawns. We’d do our own handyman work. Do-it-y0urself tasks wouldn’t be something of a novelty, but more of a normal thing.

For some, it may seem trivial. What difference does it matter whether I use credit or not. I’m responsible and pay my bills, they’ll say. And then, they’ll get up on Monday morning and go to the job that they’ll freely admit they don’t like much, but they keep it because it pays well. But, if there was no credit, they wouldn’t need a job that pays well. They probably wouldn’t need any resume tips. They’d have the ability to find a job that they enjoy. A job that is fulfilling and rewarding.

And that makes a difference. The stress and turmoil that a job you don’t like can bring into your life is not only unpleasant for you and those around you, it can actually be fatal. Without credit, keeping up with the Joneses becomes a thing of the past. You only need to keep up with what skill sets they have that you don’t and find an amicable trade.

Will this world ever exist? Wholly? No. There are way too many hands in the pot of credit for it to ever go away. Too many millionaires made by taking advantage of other people through credit. But, that doesn’t mean that you and I can’t strive to lead our lives in the direction of no credit. We can take control of our finances through good financial management principles and lead a life as free from credit as possible. And, it is possible. Don’t be afraid to dream of that. And don’t be afraid to guide your finances with intention.

Breaking free from the harness that we’ve given ourselves can lead us to a better life.

photo credit: TheTruthAbout

Obligations of the Buyer

November 12, 2010 By Shane Ede 4 Comments

With all the news lately about people “walking away” from their mortgages, increasing bankruptcies, and debt consolidation/repayment schemes, I got to thinking about what the obligations of the buyer are. And, also, the ways that we as a society have made it easy to sidestep those obligations.

Obligations

What are our obligations when we buy something? Does buying a pack of gum carry different obligations than buying a house? Naturally, we have obligations to ourselves as to the upkeep and use of that which we buy. If I buy a house, I have an obligation to myself to do what I can to make that house last as long as possible and remain structurally sound. If I buy a pack of gum, it’s a lesser commitment, but that obligation still exists as an obligation to not let my purchase go to waste and either chew the gum or give it to someone to chew.

What obligations to we have to the seller when we buy something? There are two ways to look at this. The first scenario involves paying cash for something. If the full purchase price that was negotiated is satisfied, I don’t believe you have any obligation to the seller. However, if the purchase involves debt of some sort, there are obligations that arise. If you purchase with a credit card, there is an obligation to pay that debt to the credit card company. The same is true for a mortgage, a car, and even a pack of gum. Not only do you have an obligation to pay the debt, but you also have another obligation to yourself to learn what that debt is going to cost you. This last obligation is the one that was most ignored during the fiasco that we like to call a housing bubble. Many ignored the facts of what their new houses were going to cost and bought them anyways.

Sidesteps

In the pursuit of a consumerist society, these obligations can sometimes get in the way. If I ignored the obligation to know the cost of debt and bought a house anyways, I likely entered into an agreement to pay a mortgage company a set amount each month. Recently, it’s become popularized to demonize the banks that lent the money to people as the sole problem and, as a result, it’s become no big deal to merely “walk away” (default, or stop paying) on a mortgage. The reasoning follows that it’s better to default on the mortgage than remain paying on a house that is worth less than what the purchase price was, or that has had payments adjusted higher.

In the same way, the obligation to pay credit card bills, auto loans, and most other consumer debt has been sidestepped. It’s no longer a social stigma to declare bankruptcy. Many, knowing they are about to file for bankruptcy, will go out and max out their credit lines in anticipation of the bankruptcy cleaning the slate.

As these sidesteps become more and more common, the social stigma will decrease even further. If everybody is doing it, it’s hard to demonize something. You might demonize your friend. Or relative.

Of course, this isn’t to say that defaulting on a mortgage should never happen. Or that bankruptcy should never be declared. It happens. It’s the rampant social acceptance of these situations that is troubling. What happens when it becomes commonplace for mortgage borrowers to default? The loans become more expensive. The banks have to cover their costs to repossess the house, the staff to service the loan, and associated costs with trying to resell the house. Where is that money going to come from? They aren’t going to just pay it out of the kindness of their hearts. They’ll pass it on to the customer. Suddenly, mortgages will become even more front loaded with fees and interest. When bankruptcies become more commonplace, credit availability is going to decrease. We’ve already seen that recently. People who could easily get a credit card before will be denied.

All of this is all the more reason to avoid debt whenever possible. If society isn’t going to do it, hold yourself to your obligations as a buyer. Obligate yourself to paying off your debt. Then, obligate yourself to paying in cash from then on.

photo credit: EJP Photo

The Building Credit Fallacy

October 13, 2010 By Shane Ede 11 Comments

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 report Where 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