Big Items (Car/House)
Make credit work for you, instead of the other way around. Be in control, aware of your financial situation now and where you want to be later. Develop a budget and stick to it. Simply put, if creditors can trust you with their money, they’ll loan you more at competitive rates. Having good credit is a very strong ally, but it takes persistence, effort and responsible spending and saving. Remember: you only have 100% of your paycheck each month.
What you certainly don’t want to do is wreck your credit from late payments, collections, charge-offs or judgments. That will make things difficult when you actually want to buy a home. It even makes things difficult to rent an apartment: they check your credit, all the same. Your rent history is the first verification a mortgage lender will ask for.
Your credit rating is based on the three scores that appear on your credit report, which is the one document lenders check to find out if you can be trusted with their money. There is no hidden secret to maintaining a good credit rating.
Tips
The “secret” really isn’t a secret. There are three ways to help maintain good credit:
• Just pay everything on time.
• Keep the balances below 80% of their limit.
• Limit the number of accounts you have.
Also, don’t constantly switch credit cards for that “introductory” rate; your score places the most emphasis on accounts that are 2 years old or older.
That’s it. That’s all you need to get a stellar credit rating.
A Car
So a car is great to have. You probably already know this by now by having driven one, saving for one or owned one. If you’re already making payments on a car, you understand how hard it is to pay for it, insure it, and fill it with gas. It’s a tricky balance. Let’s not also forget one of the most painful expenses: unexpected repairs.
Buying a brand new car is a bold decision to make. Most of the time it’s not the best route to take. Cars lose value right out of the gate. A new car loses 60% of its value in the first four years.
And if you’re in the city, you should have good means of public transportation. If you find it convenient enough, pursue taking the bus, or even train transit, to get to where you need. You save money, and lower emissions on the environment.
Be mindful about buying a used car. Insist on getting the car fully inspected so you know if repairs are immediate. Ask the car dealer about warranties, ask the seller about prior repairs. Check on-line for the car’s ratings. www.carpoint.msn.com
A debt on a car is different than that of a credit card. It has a beginning and an ending date. Credit cards can go on forever. Interest is calculated differently as well. Still, interest increases your debt on the car. Make sure the term on the car loan makes sense with the final age of the car. Same drill: you don’t want to be late on your payments.
A House
You may not have to deal with buying a house for a very long time, but do keep this stuff in mind. Even if you get something out of this *now*, it’ll only help you out in the future.
Buying a home is usually a sound investment. It offers great tax advantages that no other investment offers: mortgage interest deduction and real estate tax deduction. That equity build-up is “money in the bank”. This may not be something to have to worry about now; most people won’t buy a house for a long time. But, again, it’s something to keep in the back of your mind.
Once you feel comfortable with the responsibilities of buying a house (which may not happen for a while, but this stuff is good to know anyway), your credit rating will be the biggest factor determining the best interest rate you can get. The lower your credit rating, the higher the interest rate. If it’s especially low, you run the risk of not getting accepted for a loan.
If you are accepted for home mortgage loan, you have a predetermined number of years (15 to 30 years), and so many months (180, 240 to 360), to pay off the debt. You’ve probably heard the term “mortgage” before.
A mortgage is a loan using the home as “security”.
Just like with a car, if you have a significant down payment when you buy a house, your payments will be lower. Most loans require down payments for houses anywhere between 3 and 20 percent. Let’s consider a home price of $200,000. That means you’ll pay anywhere between $6,000 to $40,000, up front. It’s a big deal.
There’s a reason they call it interest: everyone is interested in your money.
Let’s say you decide to buy a house for $100,000 and your down payment was $5,000. The remaining balance is $95,000. Paid off in a 30-year fixed-rate loan (which means the rate remains the same), with an annual interest rate of 7%. You’ll actually pay $140,000 in interest rate than you do on the principle $95,000.
So, total, you paid $235,000 for that home over 30 years. Does that sound like a good deal? Well, consider that you have annual tax deductions from that home, and growing appreciation. Just for kicks, ask your parents or a relative how much they paid for their house 30 years ago and what they think it’s worth today.
Buying Large Items
Start on the small scale. If you can’t afford a mansion, don’t try to buy a mansion. That’s how some homeowners get into trouble! True wealth is something accumulated over time, like the equity in a home and other investments that grow over time. Wealth is a lifestyle not shown off with flashy jewelry and cars. It’s the result of hard work, persistence, punctuality and planning.
So what’s the difference between house-debt and credit card debt? A house is an investment; you’re investing in the house so it becomes more valuable over time. Credit card debt isn’t an investment, it’s a dead-end.
(Ever wonder why the word “debt” sounds like the word “dead”?)
Keep in mind: buying a house is great as long as you can make the payments. Your house payment is, by far, the most important payment.
Just like your rent, we all need a place to live. But if you miss three payments, the lender can start the “foreclosure” process, where the courts take back your home and it’s sold to someone else. So keep that in mind: live within your means. Besides, working just to pay a huge housepayment or rising credit card debt doesn’t leave any money left for the fun in life.
Statistics
A new car loses 60% of its value in the first four years.
The average American buys an $18,000 car, purchased over seven years at 10% interest with monthly payments of $300.
If you buy a new car for $18,000, it may only be worth $7,200 in four years, but is still likely dependable or if it has problems, would still cost less to buy and repair.
Tips
If you can, pay a little extra each month or an extra payment each year to pay off the house earlier. You’ll own the home sooner and save a lot of money in the process.
Start on the small scale at first; if you can’t afford a mansion, don’t try to buy a mansion.