Credit Information
In school, we learn mathematics, English and possibly even a thing or two about the world we live in. But one thing our schools fail at is teaching us about credit; when to use it, when to avoid it, and how much it really costs. Try buying a house; you'll need good credit. Try renting a car; you'll need a credit card. Try buying a car; again, you'll need good credit to get a low interest rate. It's everywhere, and depending on how much you understand it, it can be your best friend or your worst enemy.
The Growing Credit Industry
Making money from giving credit is part of American life. We're a nation in perpetual debt; we owe money on our cars, houses, toys, and even our groceries! In some cases, it has become a bigger industry to provide credit than actual products!
Take for instance GM, the largest car manufacturer in the world. Since implementing a credit-lending program for their customers, they make more money from the interest obtained from their loans than they do on the actual sale of their cars! No wonder corporate America is so lax on giving out credit: They make tons of money off of it!
Credit Cards
Getting a bankcard, gas card or department store credit card is a simple process, and seems like such a convenience, especially when in a bind. You need new clothes for the year, gas in your car and a few things around the house. But what will these few items really cost you?
Let's say you get a card from the local gas station at 20% interest (an average interest rate). The ad says minimum payments are around $35 a month - that sounds a whole lot better than the $100 you're spending now to fill up your car, AND the card has a credit limit of $1000. That's a lot of gas for only $35 a month! And you'll be able to pay it off soon enough when things get better'
That's what the credit card companies want you to think. Credit cards are advertised as a lot for a little. Let's turn the tables and see what this card really costs.
Within eight months, you max the card out ($100 in gas a month and $200 for those high priced convenient store "necessities" here and there). Because things are tight (with all that money freed up, you were able to splurge a little on yourself) you're able to barely make the minimum payment - $35. The minimum payment is set up by the credit card company, and is usually a percentage of the maximum balance, in this case, 3.5% of the maximum $1,000.
Now, every time you pay a little on the card, you use the freed up balance. Since you paid on the card, it's your money now, right? But in the eight months you've had the card, you've paid over $350 and you've got nothing to show for it except burnt gas and a $1000 balance you still owe.
Exactly how does the company come up with your payment? Let's look at an example in-depth:
| DATE | REFERENCE | DESCRIPTION | AMOUNT | BALANCE |
| 05/11/03 | Beginning Balance | 925.80 | ||
| 06/06/03 | ## | Payment Received | -35.00 | 890.80 |
| 06/10/03 | ######## | Interest Charge | 15.72 | 906.52 |
| 06/10/03 | Ending balance | 906.52 |
The beginning balance of the card shows what the balance was at the beginning of the month cycle. Transactions are added as they occur, and the balance adjusted. In this example, no new charges are made - only the minimum payment and the interest charge. Notice how the interest charge is added before the cycle ends. Each daily balance is added (31 total for the month of May), then divided by 31 for an average. From this total, the company calculates the new interest to be added before the next cycle is complete.
With every payment, you pay a little off the principal. The Credit Card Company averages the balance throughout the month, then charges interest on the loan. The interest is annually, so only 1/12 of the interest applies to this month.
Any amount you pay extra in the payment goes straight to the principal. But if you paid just the minimum payment, it would take you 8 years, and cost you $789 to pay off the credit card.
How much does this card really cost? Depends on how fast you pay it back, but certainly more than the products you bought with it. consumers who pay back the balance every month, pay a very small percentage of interest, if any at all. But the credit companies bank on the fact that most people will carry a balance month-to-month and keep using the card.
The fact is, using a credit card for day-to-day purchases will increase the cost of the product by 10-50% by the time you're done paying for it. Why shop at sales when you're just throwing the savings away? Think twice before buying everyday items on credit. It's a waste of money.
Your New Car
Did you see the new ad for the Kanobi 500GLs? It's incredible; 0-60 in 5.67, 350 HP, 5.3 Liter, 24 Valve - I mean, I could go on and on, but these numbers really don't matter compared to the bottom line: what you're going to end up paying for it.
Of course, the Kanobi is a made-up car, but let's say it is the hottest thing out there, and you just can't live without it. It could be a minivan for all intents and purposes, you just gotta have it. Today.
But before we go into the credit costs - let's see how much time it would take to actually save up the money to buy this bad boy. At $24,000 (as advertised), the 500GLs is a steal. Let's add $2,000 for taxes and licensing and such. If you put aside $430 a month, you could have this car in:
$26,000 / $430 = 60 months.
Holy cow! That's a long time!
So, forget that, we got to have it now. So we fill out an application for financing and find out that Kanobi Corporation is going to be kind enough to give us a 5.9% interest rate for a five-year loan. That's nothing! Won't cost us much, right? So let's check out what the payments are going to be:
$26000 x .059 (per year) / 60 months = $501.44 per month.
$71.44 more a month? That's nothing. We can afford that to have the 500GLs. Over the course of 5 years that'll calculate to be a grand total of $30,086.69 - about $4,000 more than you'd pay if you'd saved up the money.
Now, cars depreciate very quickly, and if for some reason, you had to sell your car during the first year or two, you would probably owe more than the car was worth. The old saying that a car depreciates by a 1/8 of its value when you drive it off the lot is not far from the truth.
At the end of the 60 months, you've finally paid off your vehicle. It's 5-year old car now, and you've paid over $4 grand extra for it. Was it worth it? Well, you decide. What can you do with an extra four thousand dollars? That's what people decide who have the will power to save up for a vehicle, or even - gasp! - buy a less expensive one.
The Credit Bureaus
Anytime you go into a lender to apply for credit, the lender will likely check your credit score, with your permission. Toward the end of the 1800's, when the concept of tracking someone's credit was coming into being, one store would simply have to call another store where the customer had been doing business and see how they were as a customer.
Soon, the need for consumer Reporting Agencies (CRAs) became apparent and local bureaus starting appearing throughout major cities. Inevitably, three major CRAs emerged - Equifax, TransUnion, and Experian, known as the credit bureaus. Till today, most lenders check with one or all of these main bureaus when accepting an application.
Each Credit Bureau has their own unique way of rating a consumer's credit. There is no standard way of reporting, even though they are slowly conforming to one another. For a very long time, consumers were never given the chance to see their own credit report, until the Fair Credit Reporting Act (FRCA) was established. Still, it was years before people saw the affects of the act take place.
In addition to credit history, civil court judgements, tax liens, or other legally binding transactions can be reported to the CRAs. HOW THE CRA's MAKE MONEY
The major credit bureaus make money with just about every transaction they make, except for disputing items on credit reports; something they must do under the FCRA. The following chart shows the major transactions of a CRA:
YOUR FICO SCORE
An independent agency know as the Fair Isaac Credit Organization created its own rating score for use mostly in the mortgage industry. Made up of many varying factors, assigning a point value to different credit transactions, a person's FICO score was a simple way to determine if they would be accepted as customers for a certain lender. Not until recently has a person's FICO score been available to them. It is available for a small fee at www.myfico.com.
Solving Your Credit Problems
Your credit report influences your purchasing power, as well as your chances to get a job, rent or buy an apartment or a house, buy insurance or even rent a car. Accurate negative information can stay on your report for seven years. A bankruptcy can stay on your report for 10 years!
It is possible, and legal, to clean up your credit report. Join over 80,000 people who have used Lexington Law Firm to improve their credit score and get back on track to better credit. To learn more about our services, please visit http://www.lexingtonlaw.com.
|
Credit Report Repair Information |
| Browse Archives at groups.google.com |
