The Cycle of Spending

The Cycle of Spending

Good credit is the economic reward of good stewardship. Borrow…repay…repeat. It is this very cycle that boosts credit scores into the 800’s (did you even know FICO scores could go that high?). While you may have heard about the sky scraping credit scores of others, there is no doubt that the burning question in your mind is, “How can I get there?” The good news is that good credit is attainable for everyone! The bad news is that you may have to deprogram some of those misguided beliefs you’ve held about money and how to get it, keep it, or spend it.

MYTH #1. Always keep a secret savings stash! Your debt will always be there anyway.   

FACTS: If you have savings, use it to pay off your high interest debt! In most cases this means paying off credit cards and car loans. This is because these types of loans carry higher interest rates than most forms of investment. For example, paying off a loan with an 18% interest rate is in effect, paying yourself a guaranteed 18% return on your investment! And it’s tax free!

Alternatively, if you have little debt, you may consider placing your savings in an interest bearing account early and settling in for the long haul. Over time, the compound interest will be well worth the wait!

MYTH #2. Refinancing will hurt my credit because of having my credit “pulled”.

FACTS: Having your credit “pulled” for financing purposes is known as a hard inquiry. These types of inquiries do have a less than desirable impact on your credit and should be avoided whenever possible. However, these inquiries do become necessary and can often be well worth it in the end when considering obtaining a new loan.

The process of transferring debt from a higher interest rate loan to a lower interest rate loan is known as refinancing. Clearly, it is better to pay 9% to borrow money rather than paying 19%. If you currently have debt that you are not able to pay off entirely, applying for a lower rate credit card or loan can be a wise solution and help to maintain and protect your credit. Compared to the potential impact of unpaid debt, the effect of an inquiry will be minimal.

MYTH #3. Having several credit cards “looks bad” and can lower your credit score.

FACTS: Too much of ANYTHING can be bad. When it comes to credit cards, the trick is finding what’s right for you. Different card issuers offer different rates, fees, and other factors that will be appealing to you and your needs. Take the time to look for the credit cards that best suit your personal spending habits. If you are likely to carry a balance from month to month, go for the lowest interest rate you can find. If you always pay your balance in full, the interest rate may not matter to you. Rather, your priority should be features like little or no annual fees and a grace period which will allow you time to pay off your balance before any interest is charged. You may also find features such as special “rewards”, frequent flyer miles, merchant discounts, and cash-back on qualifying transactions.

MYTH #4. I know there’s a grace period…I may as well use it!

FACTS: Most lenders and credit companies do have a grace period. Whether they share this information with their customers or not, there is typically a time period within which they will accept payments without considering them late. Another piece of information that they seldom, if ever, share is that when you pay your balance in full before the actual due date you can often avoid ANY finance charges. Yes, you read that correctly. Many banks, lenders, and creditors offer an unadvertised grace period that allows you to enjoy, potentially, interest free borrowing! Be advised, however, that if you fail to pay even a small portion of your balance you risk losing this perk permanently. To minimize your interest charges pay your bill as soon as you receive it.

MYTH #5. With my credit, there is no way I would be eligible for a credit card.

FACTS: If you have yet to establish substantial credit or you have had trouble maintaining good credit it can be difficult to get approved for a standard credit card. Consider opting for a secured credit card instead. A secured credit card requires that you provide a collateral in the form of a deposit into a special savings account. The card issuer will allow you to charge up to the balance of the savings account. By demonstrating responsibility with a secured card, you will have less trouble with approvals for traditional cards in the future.

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