YOUR CASH COUNTS
Financial Literacy
For Your Future
Most people have a great deal of experience participating in the marketplace. For most their major role is that of consumer, but many play the role of supplier as well as they provide productive work and expecting payment in return. Remember, you can play the consumer role only if you are willing and able to participate. Window shoppers are just interested bystanders. They are the ones that say “if I only had the money”. Most consumers realize that they don’t need money, at least in the short run, to be considered able to buy. Credit, in many forms, will most often be accepted in exchange for the desired good or service. It is important to realize that there are a variety of credit instruments and the decision to buy on credit is often as important as the decision to buy or not to buy. Failing to make good choices about how to pay for a purchase can often take the enjoyment out of buying that “must have item or service and result in the proverbial “consumer remorse” we hear so much about. Consequently, be prepared to acquire the insights of the decision making guide for both the decision to buy or not and how should I pay for my consumer choice?
Application Insights-What Should I Buy On Credit? is not to be viewed as an answer sheet of how you should think or value things. It does represent a selected list of possible insights that many people may have as they tackle this possible choice making case. Remember, that decision making is a personal activity and it is all about you. Your responses to the guide’s questions and activities are yours. Nobody has your values, experiences, desires, emotions, or goals therefore they can’t see the possible decision through your eyes. One thing is common to all, however, everyone should follow the process of thought that will bring out the important points to consider before making a choice. The result of following the process as described in the guide will give you the confidence that you have considered the important factors and blended them into being you.
CREDIT SCORE REVEALED
An Application Supplement
A financially literate person not only understands the benefits of being financially free, but also has a solid grasp of the tools and information necessary to deliberately seek that goal...coupled with an intense emotional commitment to seek out and follow the specific “rules of engagement”. In today’s world, a good example of this complexity and commitment to the topic of buying on credit is personal credit score.
As is often the case, operationalizing information requires detailed information that emanates from the general knowledge. The “devil is in the details” perspective MUST be used if the buying on credit is to be understood and acted upon correctly. Simply, “the elephant in the room” regarding this topic is understanding and applying credit score information. Without this connection, it will be impossible to make good credit use decisions.
Initially, it is important to realize that most participants in the marketplace have or will have a credit report that results in a credit score (FICO). The score ranges from 300 (low) to 850 (high). It is calculated by considering and weighting marketplace activity in five categories including:
It should be no surprise that payment history is a primary factor in determining a credit score. Paying bills on time or not is considered a good predictor of future behavior. When thinking about buying on credit, be sure to think about how easy it will be to pay the monthly payments on time.
Obviously, an important factor in paying bills on time is the number and amount of the debt. No matter how much is earned, it is possible to use credit to such an extent that the money runs out before the bills do. As being delinquent on paying bills is a huge red flag, do everything you can to avoid sending this negative signal to the people that calculate your credit score.
Simply, a credit score is designed to predict future behavior in the marketplace based upon past behavior. The longer the behavior can be reviewed, the more comfortable the credit score folks are that their prediction is accurate. Yes, this places a special burden on younger people and is even another reason to use credit intelligently so your credit score is built on a solid responsible foundation. This means that the age of your accounts matter. Older accounts paid on time on are more important than new accounts.
Credit score calculations consider the credit mix. Often better credit scores come from a mix of credit cards, retail accounts, installment loans, finance company accounts, and mortgage loans. All credit cards will often give your credit score a hit.
Credit score calculations consider timing. Opening several credit cards in a short period of time represents a greater risk to paying bills on time, so it tends to lower credit scores. This is especially true when people have a short credit history. Note: timing is also important when you apply for credit to buy a car, buy a house or seek a student loan. As these are loans that may have a number of requests that result in only one debt, make your applications within a 30-day window so the number of applications doesn’t negatively influence your score.
Knowing how credit scores are determined and the philosophy behind the process will help earn and keep a good credit score. The assumption is that this goal is important. Once again, more information is better than less. How is this "so what" question answered? Most people are very surprised the extent that a credit score impacts people’s lives and the areas of impact are growing. Obviously, credit scores will determine approval rates for revolving credit, car loans, mortgages, etc. Really bad credit will earn the applicant a “no thanks” response.
Often, however, a person’s credit score will not mean a rejection, but will determine the “cost” of credit. Bad or moderate credit scores will mean higher interest rates or bigger down payments. All those great credit deals seen in ads usually have the small print…based on credit approval. This means lower prices for credit go to the high credit scores and the higher prices go to the lower credit scores.
Make no mistake about it, this credit cost/credit score relationship can amount to a huge number of dollars and, in the case of a car or home loan, it lasts a long time. Sad but true, but we are not done yet. Insurance rates are influenced by credit score, ability to make long term purchase contracts like cell phones or pay “on time” agreements, and rental contracts are impacted.
Don’t be surprised if a future employer looks at your credit score before making the decision to hire or not. If all of these things don’t matter, factor in the fact that for adults over 25 people are less likely to date someone with bad credit. When looking for that “special someone”, young adults realize the biggest problem in marriages revolves around finances and being proactive is a good way to avoid problems.
The benefits of having a good credit score are numerous and huge. The importance cannot be overstated and the need to be concerned daily is critical. Don’t leave home without it doesn’t mean a credit card anymore; instead it means your knowledge and commitment to make good credit score decisions. Always remember:
This supplement for buying on credit is designed to add the necessary in depth details involving credit. It should enlighten and scare most people. As has been stated many times (and will continue to be) being financially literate and committed to financial freedom is not easy and it requires work, practice, and a relentless thoughtful approach. The benefits are well worth the effort.
ADDITIONAL SOURCES
1) Four Reasons You Should Use A Credit Card.
2) 10 Ways Students Can Build Good Credit.
3) Use Your Credit Card As An Emergency Fund?
4) Credit Card Basics: Dos and Don'ts
5) Present Value Calculator
6) Debt Management Calculators