Why Credit Scores/Cards Matter!
Some things in life will inevitably happen, and making big purchases is one of them. Houses, vehicles, vacations; you name it! And while these things can be exciting to obtain, the average American adult will only have two options: pay in cash, or apply for credit and/or a loan. There are pros and cons affiliated with each of these decisions (yes, there is a con to purchasing things with cash–and I will explain this at a later date), but the reality is MOST of our major purchases will be linked directly to us securing a loan, or another form of credit. This means taking a look at your….CREDIT SCORE (insert horror movie screams).
Ah yes, the credit score. Such a private, touchy little topic isn’t it? I am a firm believer that most of us feel more comfortable discussing the most embarrassing moments in our lives, versus sharing our credit score (or perhaps your credit score is the most embarrassing moment of your life?) But fearing our credit score or even being ashamed of our credit score at least subconsciously lets us know that those scores ACTUALLY hold merit and matter. Because the reality is, credit DOES matter. Don’t believe me? Keep reading….
Readers, meet Melanie. Melanie in on the hunt for a new car, and because Melanie is pro-environment and practical with most of her purchases, she opts for a brand new Honda Accord Sedan. The model Melanie likes carries a price tag of $25,500; after negotiating the price and adding her trade in value. Melanie follows the dealer to the finance department, and begins the painstaking process of purchasing her car.
Unfortunately, Melanie has a few blemishes on her credit report. As many college students do, Melenie was approved for a credit card at the tender age of 18. Although she was an unemployed college student, Melanie made several purchases on her card, only to worry about the payments later. And even though Melanie made payments here and there on her card, they were rarely on time, and this caused to credit score to take a turn for the worst.
The finance manager informs Melanie that her credit score is a 550, but not to worry, she will still be able to finance the car of her dreams! After crunching some numbers, Melanie is able to secure a 6 year loan with an 11% interest rate, bringing her monthly payment to $554 a month. Comfortable with the payment amount, Melanie shakes the finance manager’s hand and signs on the dotted line…
Melanie has always stayed on top of her financial situation. Unlike most of her peers, Melanie avoided those tempting college credit card offers until she secured a part-time job allowing her to pay her credit card on time each month. Not only did Melanie pay the card on time, she made sure to only use the card for necessities, ensuring her balances stay low and manageable.
The finance manager informs Melanie that her credit score is a 720, and she eligible to participate in the special financing promotion the dealership is offering: 1.99% interest rate for 60 months. This promotion allows Melanie to own this car for $447 a month until the life of the loan. Comfortable with the payment amount, she shakes the finance manager’s hand, and signs on the dotted line…
In both of these scenarios, Melanie was able to meet her objective; buying the car she desires. But let’s dig a little deeper and focus on the big financial differences between the two scenarios.
When comparing, the obvious difference is the noticeable decrease in the monthly payment. $554-$447= $107 less each month; that means Melanie is saving around $1, 284 each year!
That’s pennies compared to the final cost of the car in each scenario. At 11%, Melanie will ultimately spend $7,740 in interest during the duration of the loan, bringing the final cost of her new Honda Accord to a whopping $33,240 (better known as a 300 series BMW). Compared to the $1,320 she pays in interest at 1.99%. That is a $6,240 difference paid towards interest! Do we now see how and why the credit score holds the clout that it does?
And this isn’t spare change found in couch cushions, or under the seats in our cars, and even in the bottom of our bags and purses. Having and additional $6,240 in your possession allows you to:
Invest the maximum contribution amount in an IRA.
Start the emergency fund we claim we can’t afford to do.
Make payments on (or pay off) any existing debt.
Purchase seven pairs of the Christian Louboutin Pigalle Plato 120mm pumps.
Treat you and your best friend to a fun-filled weekend at Coachella (this includes flights and hotel accommodations).
Take a trip to Dubai or Bora Bora.
Pay for a semester of Graduate school.
Put a down payment on a house
And the list goes on and on…
Having a good credit score doesn’t just impact financial decisions. In today’s job market, many companies are pulling credit reports as part of the hiring process(don’t be worried, it’s not too common, but it does happen)–making it that much more essential to keep your credit worthiness up to par. Now don’t worry. If your credit score is less than stellar, there are some tips and tricks to improving your score in a timely fashion (without spending your hard earned coins on credit improvement services). With a little diligence and desire, that D score can easily become a B or A. In the best interest of your financial future, keep learning, keep trying, and keep reading. Until next time…