Credit Challenges

Hi Hopeful.

Welcome to Prius Chat, and thanks for a thoughtful post.

My experience with credit is the opposite of yours: I never borrowed money in my life. If I could not pay cash for something, I did without. When I was first on my own (almost 4 decades ago) I saved up for 2 months to buy a blender. Some years later, I bought my first car, for cash, and immediately began making "payments" into an account with which to buy my next car, so that instead of paying interest, I was collecting interest. The "cost" to me was merely delaying the first purchase.

Buying on credit is buying something before you otherwise could, gaining a few years on the purchase, at a cost of a lifetime of paying interest to lenders.

My problem came when I wanted to buy a cell phone. The wireless companies would not sell me a phone without a credit history. I could show them that in the three decades I had been an adult, I had never missed a utility payment, but utility bill payments do not go on your credit record, and the company bureaucracies were incapable of looking at independent information. I had no credit history, so they woud not sell me a phone. Eventually I stumbled on one Verizon dealer who actually had a brain, and who saw that a 50-year-old with no bad credit was obviously a good risk.

My second problem came when trying to rent a car on a trip to Hawaii. I had a car reserved, but they refused to rent it to me because I had no credit history, and I was trying to use a debit card instead of a credit card. Apparently a credit card carries automatic insurance that a debit card does not. With a credit card or a good credit history they'd have rented me the car. Again, I finally found a company that was willing to rent me a car, but it took a couple of hours, when I was already exhausted from the long flight, and the ordeal of reporting my lost luggage (which turned up the next day).

As a result of these experiences I accepted an offer of a no-annual-fee credit card from my regular bank, and I began using it in place of my debit card, always paying my bill in full every month. Eventually I discovered that I could set up an automatic payment out of my checking account, so that the balance is paid in full every month if I should happen to miss it, effectively converting it into a kind of debit card.

When news appeared a while back that credit scores were being used by security agencies to help determine who would not be allowed onto airlines, I was concerned that my refusal to use credit might get me turned away from use of airplanes, but I suppose that by now I have a credit score, and indeed I have had no problems getting on airplanes (though they still lose my luggage and do everything else they possibly can to make flying a miserable experience.)

A while back I wrote to one of the credit reporting agencies requesting my free credit report (the law requires them to provide a free report to any person once per year) but they never sent it. I'll have to try again.

The borrowing and lending of money has a legitimate place in a market-based economy. Few businesses could get started or expand without money from outside sources, and debt is one way of obtaining that money. On a personal level, there are some productive investments that justify borrowing. Depending on markets, it can be cheaper to buy a house than to rent one, and a car purchased on borrowed money makes sense if it allowes you to take a job which raises your income more than the amount of the payments.

But most personal borrowing is a case of paying an exhorbitant price to have stuff sooner than would otherwise be possible. And the credit industry, especially the credit card industry, with its outrageous interest rates, is shameless exploitation of the impatience and greed of consumers.

The credit card industry calls people like me "deadbeats," because we pay in full and therefore pay no interest. We get the use of convenience plastic for free.

Of course, they still make money because they charge the merchants a percentage of everything we charge. But that's not my fault when so many merchants insist on credit cards. (Hotels, rental car companies, internet commerce sites, etc.) I even get 1% cash back on the total amount I charge.

Nowadays it's worse than it was when I was young, because they've rigged the system so that many kids graduate from school with enormous student-loan debts, thus starting out life deeply in debt, and it may be virtually impossible for some of them ever to climb out of the debt hole. All they need now is a legal way to transfer debt from parents to children, and they'll have completed the transition to universal "debt slavery."

 

Daniel, if you want your credit card use to be reflected in your 'credit history', you have to wait for the cycle to end before paying. Note, I am not saying to pay interest. This is true because credit card companies report balances to the credit agencies just before end of cycle once a month, so too early payment leads to a balance of zero, interpreted as non-use of the card.

I 'solved' this problem in my house by having one set of cards used for daily purchases that almost always report as zero balance beacause I pay the total balance every two weeks for budget purposes, and other cards that are zero apr games paid monthly during their grace periods.

It suits my sense of irony that my excellent credit is maintained by interest free loans from the credit sharks.

There are other uses in our society of the credit score, that makes it important to look after beyond obtaining loans and the ones you have mentioned: insurance rates, employment checks, and part of a 'profile' on would be renters come to mind. I'm sure there are others.

The free report mandated by the feds does not include a score. To get a score, trial a credit service and cancel during the free period.

Hopeful, two common misconceptions regarding credit scores deserve mention:

1. Paying interest does NOTHING to improve your score. All that matters is that you pay back the debt according to the original terms.

2. Size of the debt does not matter. One penny debt is the same as one million. The amount of credit offered on a new line *will* be determined in part by size of past debts, but that is a different story from the credit score.

Homes, business and education can be excellent reasons to take a loan. For everything else there is frugality: live within your means.

 

<div class='quotetop'>QUOTE(EricGo @ Oct 15 2006, 11:48 AM) [snapback]332989[/snapback]</div>

Actually, it does. When you apply for a big loan such as a home or car loan, they look at things like amount of credit available and how much you have used. They also do look at the overall amount. If you have an anual income of $50k, but you have a $million in loans, they are going to be very reluctant to loan you more money. How are you making payments on loans with such a huge balance when your income is low. It doesn't add up, and many places will say no becuase of the greater risk that you will default because of over extension. They want to make sure you will be able to pay, and size of debt does matter.

 

Read again what you quoted.
Differentiate score from credit limit.

 

<div class='quotetop'>QUOTE(EricGo @ Oct 15 2006, 02:07 PM) [snapback]333035[/snapback]</div>

My point is even if you have an excellent credit score, places will be reluctant to loan you more money if it appears that you have borrowed beyond you ability to pay. In this respect debt is related to score. You cannot completely separate the two, as amount of debt is part of what determines the score.

Yes, if you want to make as simple of a statement as possible, then yes, by itself size of debt doesn't matter. Of course in the real world, it all depends on many different things: ratio of debt to income, type of debt, ratio of credit given to credit used. All of these are factors used to determine score. If it was such a simply computation there wouldn't be so much mystery in what a credit score is. I don't know anyone who can actually list all the things that determine your exact credit score. It's a complex equation they use. If someone said I have $x in debt, what is my credit score, you could not answer that. There are too many variables.

So amount of debt IS important to credit score.

If Bill Gates has $30 million in debt, then no big deal. If I had $30 million in debt, people would wonder.

 

<div class='quotetop'>QUOTE(EricGo @ Oct 15 2006, 08:48 AM) [snapback]332989[/snapback]</div>

Well, then maybe I still don't have a credit history, because I always pay on time. But then, I don't give a hoot if I have a credit history or not. Now that I have a "credit" card I can rent a car when I travel. And now that I have a cell phone, and I always pay my bill, I don't think Verizon is going to cancel my phone service because I still don't have a credit history.

I have no intention of ever borrowing money. No possessions are worth the stress and ulcers of struggling to make loan payments. I have lived with virtually no possessions. I calculated carefully what I could afford to buy and I made do without what I could not pay for. My financial situation is so much better now that I'd have a hard time spending all I have, so it may be a moot point, but I still don't buy what I cannot pay for.

 

CREDIT CARDS - - GOOD/BAD?

I am rather sure that most will agree that credit cards can (& should be) used wisely. I am 73, so I think I can provide some useful observations.

• If you have trouble paying bills on time, use credit cards sparingly. The interest charged on the unpaid interest can literally eat you alive!
• If you can use credit cards wisely, why not use them to your advantage? I personally urge using "Cash back" credit cards like:
• American Express (blue): 3% cash back...restaurants. 2% cash back...traveling. 1% cash back...everywhere else.
• Chase 'Rewards:' $50 gift after first use. 5% cash back...gas, grocery & drug stores. 1% cash back...everywhere else.
• Citibank 'Driver's Edge:' 6% cash back...gas, grocery & drug stores (first year), and 3% cash back from then on. 1% cash back...everywhere else.

So far, in the first 10 months of this year I have received $672 in "Cash back" rebates. Doesn't this sound like a wise use of credit cards? Of course there are some 'catches.' You HAVE to pay all credit cards off in full each month. And it works better if you put everything you can on your credit cards.

 

<div class='quotetop'>QUOTE(fphinney @ Oct 15 2006, 10:36 PM) [snapback]333309[/snapback]</div>

In other words, you are suggesting using credit cards as if they were debit cards. Plastic is very difficult to do without, and a debit card, or a credit card used as though it were a debit card is very useful.

It's the use of credit I consider foolish.

Note, however, that you are paying an extra $2016 in order to get back $672 because the bank charges the merchant typically 3%, and since the merchant is forbidden by the credit card contract from charging extra to users of plastic, the merchant passes the charge along to customers as a 3% higher price.

Of course, you pay that $2016 whether you use plastic or not, so you might as well use your credit card and get back your 1% of the 3% the bank charges the merchant. But this is a case of the banks robbing consumers. If you use cash-back plastic (as I do for large purchases) the bank is robbing you of 2% of all the money you spend, and if you don't, the bank is robbing you of 3%. Given that, you are better off using it than not. But you are still being robbed.

My post, however, was not against credit cards as such. My post was against the use of credit. And on that point we seem to be in complete agreement.

 

Nothing wrong with credit at all.

Just make sure it is making you money, not financing a lifestyle.

 

I have bought and sold 5 houses in 44 years. I’ve never once missed a payment on anything. The last time I borrowed money for a car was in 1984. I’ve owned 3 new cars since 1991 where I’ve paid cash for the purchases.

The problem I just encountered with Progressive Insurance was that since I have no CAR credit history they raised my premium! Can you believe that? My wife paid for 6 months of the insurance. Once it’s passed that date I’ll be sure to change carriers.

 

<div class='quotetop'>QUOTE(tbstout2 @ Oct 16 2006, 01:04 PM) [snapback]333469[/snapback]</div>

I'm skeptical. Did you try speaking with a supervisor yourself ?

 

i didn't qualify for the lowest premium available with progressive because i had never had a car loan. this was a few years back on my old buick, but i can confirm what happened to tbstout2 does happen.

 

"Neither a borrower nor a lender be"

Good advice, but not very practicle. Borrowing is not necessarily a bad thing. Almost every small business requires a line of credit to start with. It is not necessarily bad for consumers, either. The homeowner who has a large mortgage is almost always better off than the renter because:

1. Mortgage interest is deductible in the US.
2. Home equity is growing, even if slower than before.
3. The mortgage is fixed,so your payment will not go up as rents do every year. (Don't even think about variable rate mortgages)

Borrowing for a car also makes more sense, in my opinion, than leasing, and for the same reasons as owning a home. Leasing is just another name for renting.

Finally, it can make sense to borrow for things simply because you need them now. Your child needs a piano because it would be good for their mental development. As long as your interest rate is not too excessive and you will be able to pay back the credit card within a reasonable time (say, a year) then it is better to get the piano now and pay a little interest than to save for years and make your child do without. If your credit rating is good, you can often roll over balances into no interest for 12 months, thus avoiding interest altogether. In fact, by rolling over into these interest free cards, you should never pay interest.

You do have to have discipline and control over your use of credit (as with everything else in life) but if you do, it is a useful financial tool.

 

Credit is nothing but another intangible product you buy with through interest rates. Like all products, there are good, bad, over-priced, and under-priced... Nothing more, nothing less.

In today's environment, credit matters far less than it did in the past. It USED to be, if your credit sucked, you could NOT get a car loan, now, there are tons of "no credit/bad credit/no problem" financing alternatives. Lenders/institutions have seriously refined, in essence, "group risk" actuarial calcs. in the past 10 years or so...

The long and short of it is: if you want a Prius and your credit sucks, someone WILL finance you. Sure, the interest rate is going to suck, just keep refinancing the loan every six months/year...

Finance is totally arbitrary... h34r:

 

"In today's environment, credit matters far less than it did in the past"

I disagree. While you may be able to get credit in the sub prime market, you will be paying a ridiculous rate like 18 or 19 percent. Few things in life are more important than having an excellent credit rating; these include having good health and a good spouse.

If you are very disciplined, you can actually make the credit card companies lose money - you roll over balances to a zero percent for 12 months account and don't use the card - just park your debt there for a year. Just before the year is up, if it is not paid off, you roll it over into another one. Simple, isn't it? The credit card company has given you use of money for a year for no interest, and they are therefore losing money due to inflation. Make them work for you.

(I know, there is a balance transfer fee, but it should not be more than about $60.00. Well worth it, and still less than the cc company is losing to inflation.)

 

<div class='quotetop'>QUOTE(jared2 @ Oct 17 2006, 04:38 PM) [snapback]334139[/snapback]</div>

getting something at 18 or 19 percent is still getting something, opposed to getting nothing, which is the way it was not too long ago.... Today, even the person with the crappiest credit can own a home and car. On top of that, people who claimed total bankruptcy not more than a year later (sometimes even less), can still get homes and cars... the math has already been worked out....

as for making credit card companies lose money... I disagree... on an individual level yes, I agree, especially if you ONLY transfer, the second you use that card, even if you pay it all off, they make their money on the merchant end (daniel posted a nice explanation somewhere). On a non-individual level, I, as I stated before, I disagree. For every disciplined person, there are what, 1,000 that aren't? ...and THEIR interest rates already "take care of" those disciplined people anyway....

 

<div class='quotetop'>QUOTE(EricGo @ Oct 15 2006, 08:48 AM) [snapback]332989[/snapback]</div>

Odd, I have one card that I use for virtually everything and virtually everyday, and I pay the balance due on every statement on or before the due date. I never have a zero balance -- I could only have one if I stopped using the card. BTW, according to equifax one of the things that subtracts from my score is that I have a balance on the CC. WRT $1 million, I don't know if that would be treated differently than my average $2.5K in CC debt, but a sudden upward change in debt level would certainly ring bells. In fact, some of the things that have a negative impact are kind of counterintuitive. Basically the credit score scheme doesn't like change. Queries of your report are a negative impact since they may mean that you're about to take on additional debt. Kind of obvious, but cancelling credit accounts is also a negative. I guess the theory is that you may be in trouble that they can't see. Don't get me wrong, if you really are in over your head, by all means, cut those cards up. Your credit score is probably already in the toilet.

 

<div class='quotetop'>QUOTE(jared2 @ Oct 16 2006, 01:38 PM) [snapback]333665[/snapback]</div>

That's the only statement I would quibble with. It's kind of hard to compare financing a depreciating piece of machinery with a home that will almost always appreciate over time. WRT Lease vs. Financed purchase, the decision for me was always whether you intend to keep the car after it's paid off or not and whether you're likely to get into exorbitant excess mileage costs. If the answer to both of those questions is no, then costwise the lease almost always gets you a better deal. If the answer to either question is yes, then probably not the best deal. Cash is better than either, but of course isn't necessarily feasible.

 

All the calculations about renting vs buying, and all the schemes for taking the credit companies for a ride by using their limited-time zero-interest offers, all neglect one really big consideration: The stress you impose on yourself when you go into debt, vs the peace of mind when you owe nothing.

As for borrowing to buy the kid a piano, there are cheaper instruments out there. But if your kid really has the potential to become a concert pianist, then I'd agree on borrowing for a piano. If the kid's a garden-variety musician, she can learn music on a $100 electronic keyboard. Or give her lessons on the oboe instead of the piano. The Oboe is a nicer-sounding instrument, and she can carry it with her on the bus.