Beating Broke

Personal Finance from the Broke Perspective

5 Ways a Better Credit Score Leads to Better Finances

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BookkeepingEverybody knows that you want to have the best credit score you can.  Why?  Because the better your credit score, the better the rates you can get on your loans, of course!  But, did you know that there are other reasons to try and improve your credit score?  In fact, here’s five ways that having a better credit score can lead to better finances.

  1. More money.  This is the obvious one.  A better credit score leads to better rates on loans (see above), and better rates lead to less interest paid over the life of the loan.  And less interest paid leads to…  (wait for it) a  better bank balance!
  2. Better rentals.  It’s a sad fact that many landlords are doing credit checks on prospective tenants these days.  They’ve got assets to protect, so it’s a smart move for them, but the fact that there are so many landlords out there getting burned that it’s become necessary is sad.  But, having a good credit score can help make sure you don’t get turned down for that great apartment down by the beach!
  3. Quicker payoff.  This one goes really closely with the first point.  With those lower rates, and lessened interest also comes the ability to pay the loan off quicker.  And, of course, a quicker payoff means a much better financial situation.  Especially if you avoid any new loans afterward.
  4. Any loan you like.  If you must loan money, at least do it smartly.  With the current state of affairs, you can’t just walk in and get a loan that has a pulse as it’s only requirement.  In fact, many banks and credit unions are cutting way back on their sub-prime lending for anything.  (P.S. the term “sub-prime” doesn’t just apply to mortgage loans) If you have poor credit, it’s much more likely, today, that you’ll get turned down for a loan altogether.  Better credit means that if you really need a loan, you probably can have one.
  5. Less fees.  We all hate fees.  Well, all of us except the financial institutions.  A growing number of them are making a growing amount of their revenues from fees.  And many have moved to an account structure that is based off of risk.  And risk is determined by credit score.  A lower credit score could mean an account with higher fees, or with monthly fees that some accounts might not have, while a higher credit score might qualify you for a different account without those fees.

So, you see, having a good credit score can really send your finances in the right direction.  And, having a bad credit score can really send them into the dumps in a hurry too!  Unless you’re very dedicated to the extreme frugaler lifestyle, and never plan on really using money, it still pays to have a good credit score.  It doesn’t take much to build it, and you might be glad you did someday.

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VantageScore: A New Way to Figure Credit Scores

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Dave Ramsey doesn’t have one.  I didn’t have one when I first graduated from college.

What am I talking about?  A credit score.

Our reasons are different–Dave Ramsey shuns credit, and as a recent college graduate, I hadn’t yet opened a credit card account nor bought a car with a car loan–but we were still in the same situation.  So, how did a recent college graduate making less than $35,000 a year get lumped in the same high risk category with Dave Ramsey?  Simple.  FICO didn’t have a score for either one of us because we hadn’t used credit in the last 6 months.

Life Without a FICO Score

Of course, if you’re Dave Ramsey earning a gazillion dollars a year (just joking, sort of), you don’t really need a credit score.  You can pretty much buy what you need with cash.

However, if you’re like the majority of Americans, you need a credit score to do the most basic of things like rent an apartment or qualify for a car or home loan.  (Okay, if you follow Ramsey’s advice to stay out of debt, you don’t need to qualify for a car loan, but you still likely need a home loan.  Besides, many landlords routinely ask to check your credit before agreeing to allow you to rent their apartments.)

For many, then, there is a problem.  How can you shun credit cards as Ramsey advocates and yet still have a credit score?  For years, the answer used to be–you can’t.

However, CNN Money reports that hope might be on the way in the form of a VantageScore.

What Is a VantageScore?

A typical FICO credit score simply looks at the last 6 months of your credit history.

VantageScore, which was created by the three credit bureaus (Experian, Equifax and TransUnion) and unveiled in 2006, instead looks at 24 months of payment activity including payments that don’t require credit cards such as rent or house payments and utility payments.

How Many People Could Benefit from VantageScore

According to CNN Money, nearly 64 million Americans don’t have enough credit history or activity to generate a FICO score.  Of that group, 10 million have excellent credit, and another 20 million have good credit.

Currently, many banks and other lending institutions are missing out on those consumers because they essentially have no FICO score.  The VantageScore would show that these consumers are attractive to lenders because they are responsible with their money.

When Will VantageScore Become Mainstream?

For people without credit to benefit, VantageScore must become more mainstream.  Currently, almost all lending institutions rely on the industry standard, the FICO score.

Until VantageScore becomes mainstream, if you are one who shuns credit, you may be faced with a difficult decision–either use credit sparingly every month and pay it off immediately, or save enough money to pay for everything you need in cash.  (This, of course, is Dave Ramsey’s preferred method.)

Do you use credit just to keep a high credit score, or, like Dave Ramsey, do you shun credit?  If you shun credit, have you had problems with not having a FICO score?

 

Are Personal Loans Ever Right For You?

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Is a personal loan ever the right choice for you?  I’m not talking about payday loans, or those fun (or not) personal loans that happen in the back alley of a pawn shop, but honest to goodness personal loans from a bank.  Maybe you’ve heard them referred to as an unsecured loan.

A personal loan is usually called an unsecured loan because it has no property securing its repayment.  Unlike a car loan, mortgage, or other secured loan, there is nothing for the bank to come and repossess if you should default on the loan.  It’s a loan based on your credit alone, and your personal ability to repay it.  Because of the unsecured nature of the loan, the interest rate is usually a bit higher than a secured loan.

And, because of that higher interest rate, personal loans are generally frowned upon.  The only way to get a “loan” at a higher rate is to use a credit card.  Credit cards, actually, are a form of personal loan.  Think of them as a personal line of credit.

Are there good reasons to get a personal loan?

The answer, much like most other things related to personal finance, is that it depends.  Some people will tell you that they are an absolute no-no.  Don’t do it, under any circumstances.  I tend to lean a little bit more towards the middle.  I don’t think you should use them every single time you need a little bit of money.  That can get a bit cumbersome, and can lead to bad credit practices.  But, I also think that there are times when a personal loan can be beneficial.

Personal LoansWhen I used a personal loan.

I’ve borrowed money from a bank in the form of a personal loan.  Once.  It was the only time I really needed to do it.  It was near the beginning of our journey towards getting out of debt.  A journey we are still on, mind you.  After several years of very slowly building credit, we were on the right track.  And then stuff happened.  We needed some money to help pay for some bills.  Without anything to secure a loan, I was able to get a small loan from my local credit union.  It helped bridge the gap between what we needed to keep our bills current, and save our credit, and getting behind on stuff.  It wasn’t a huge loan, and it wasn’t any more than we needed.

Our usage is one way that I think that a personal loan can be a good thing.  There are other ways that I think they can be helpful.  Using them smartly, and only taking what you need is always the rule, though.  Using them to help bridge gaps in funding for capital investments in your company, paying off a higher interest rate credit card, and even for a little bit more to help pay for home improvements.  Obviously, using them for things that can be considered an investment.  Either an investment in the traditional sense in that it returns some amount to you, or investment in that it saves you an amount.

What about you?  Have you ever borrowed on a personal loan?  Do you think people should?

img credit: StockMonkeys.com on Flickr