In today's world it seems most people fear this topic; CREDIT. now there are many misconceptions about credit and many ideas about credit, good or bad. So i will start this topic by going over some of the misconceptions and ideas. Afterwards i will talk about how it can help you, and more importantly, why you need it.
Lets tackle the big one, credit is evil and/or my parents say I don't need it. This one is just a flat out lie. Credit is not evil, it is not a living sentient being it cannot be evil. Having credit does not mean you are a bad person, nor does it mean you have any personal label because of it (This refers to the thoughts like "oh he has a lot of credit he must be in a lot of debt" or my favorite "He has a credit card he must be bad with money"). I will tell you anyone who does not have credit or a credit card is bad with money (I will talk about this later). The other part of the resentment towards credit is people are told they just do not need it. They are told if they stay away from it they will prevent debt and create good budgeting practices and be more apt for success, again this is wrong. The credit companies do not care if you think you need it or not, they will judge you the same. Then, when it comes time to buy a house or a car; you will not have it and either not get the object or have to pay dearly for it.
I will expand on that idea a little more. Usually i would show the vast amount of difference you would pay for having different rates on mortgages. But that is a lot of math and very complicated. For the sake of keeping things simple and easy to understand lets take two people, Bob and Kathy. Bob is a normal person he has a few credit cards and bills and pays them on time. He goes to the bank and asks for a ten thousand dollar loan. The terms are 10% interest over the course of five years. Now again i am going to try and keep this simple (and since all lending offices are different) i will just link a calculator where you can plug it in http://www.banksite.com/cgi-bin/bankloanacalc2.cgi . You will find Bob will pay about 212 dollars a month and paid an extra 2720$ in interest. Now lets take Kathy, and say she doesn't have any credit at all! (NOTE: having no credit is WORSE then having bad credit). So she finally finds a bank that will loan her the same ten thousand dollars. But because she has no credit she has to pay a 25% rate. plug that in. That makes her monthly payment about 294 dollars and a total of 7640 dollars of extra interest paid. That is almost 5000$ extra, for the same amount, just because Kathy did not believe in credit.
That was just one illustration of why credit is important. i will provide one more in a different scenario. Bob's mother is ill and lives in another state. Bob cannot afford to fly to florida to see her, but uses his credit card to visit her before she passes. Kathy (not believing in credit still) has the same situation but does not have a credit card. She applies and applies but is denied and does not get a chance to see her mother before she passes.
You don't buy insurance because you think you will get in a car wreck, you buy it just in case. Credit should be looked at in the same light, get it while you can. Use it responsibly and it will save you money, and from bad situations.
One final thing. Credit cards almost always offer rewards. So you get cash back on your purchases you are going to make anyways. Debit cards do not. By not using a credit card, you are throwing away free money.
Next blog i will talk about how to improve your credit so make sure to check back in! Also if you ever have any questions or want anything discussed you can always reach me at Survivingfinancescharles@gmail.com
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