There seems to be so many viewpoints when it comes to bad credit vs. good credit. But do you know the benefits? Let’s dive into the two and see if we can give you some helpful information.
There are some people who feel they want no part of the credit world, whether good or bad. Unfortunately, in these days and times that view is not helpful. It’s up to you how you desire your credit to be. So let’s take a look at them both and see the advantages and disadvantages of each.
Advantages of Good Credit
First, let’s take a look at good credit, and consider its many advantages. When purchasing a home, you will find that most creditors prefer you to have a FICO score of 630 or higher. FICO scores can range as low as 300 and as high as 850. Having a higher score puts you in a position to make large purchases such as mortgage loans or a new vehicle.
It’s not just about the ability to purchase tangible items, however, higher scores open the door to many other options. As a child, I saw my dad buy things such as clothes and food without using cash. I would see him sign something and we walked out the store. At the time, I never understood how that was possible.
Finally, I asked him why he never paid for anything and how was he able to walk out the store without giving the cashier any money? It was at that moment he explained to me that he had good credit. As a child, I really didn’t understand the real meaning of good, bad, or any credit for that matter. All I knew was my dad rarely paid cash for stuff.
So let’s look a bit deeper at the idea. Good credit tells a creditor that you are, in layman’s terms trustworthy of paying back your debt. Ask yourself, are you trustworthy in paying off your debts? Another advantage of having good credit is the ability to receive lower interest rates when looking to purchase a home, to buy a vehicle, or get a loan.
You work hard to make sure your credit score remains high, right? Unfortunately, all your hard work could be hurt by small things that could have a big impact on your financial history. You might be surprised to find out that even a parking ticket could take your score down a few notches. By understanding what will/will not affect your score, you can help reduce problems that aren’t conducive to a clean bill of credit.
Are You Carrying an Unnecessary Burden?
Now let’s look at the flip side of the topic and explore the opposite.
Bad credit carries a heavy load.
It is a burden that you really don’t want to bear. Here’s what I mean by heavy load.
You have the strongest desire to purchase your first home. However, you notice that every creditor tells you the same thing: you first need a score of 630 or higher, but your score is in the 500s. Disappointing isn’t it? You drive past a car lot and see your dream car. When you pull in to inquire about it further, you are told your credit is too low to receive financing. Are you getting the picture yet on how bad credit isn’t the place to be?
The Leverage of the Numbers
Let’s take another look at the disadvantage of bad credit. Say you find a dealership that is willing to take a risk on you, despite the numbers. This dealership is even willing to let you get your dream vehicle. Your dream car will cost you $25k with an interest rate of 21%.
Thankful for the opportunity, you take the loan out for a 60-month term. You will have paid an astounding $51,465.81 for your dream car, when the five-year term is up! In contrast, a person with a credit score of 725 purchasing that same vehicle for $25k will have a much different experience.
Can you guess the amount of monetary leverage having good credit makes? That person will get an interest rate of 3.75% for 60 months. And at the end of the term, he/she would only pay back $29,725.82. What a different good and bad credit can make!
Clearly, having good credit instead of bad credit can mean cash staying in your pocket and not going to a creditor. Credit is needed for even simply getting your utilities turned on. Bad credit can require you to put a down payment just to get your lights and water turned on. There are some employers/companies that will not hire you because of your financial history and how you conduct your own finances.
One of the main qualifications needed to work in a financial institution isn’t a Master or Bachelor degree, but it is having worthy credit. I once asked a good friend of mine that works at a financial institution, why was credit so important?
She explained: Working in finances means you are dealing with other people’s cash, as well as their credit when they’re inquiring about loans. If you cannot handle your own finances, how can you advise and help the customers coming into your financial institution? So, it’s that simple. Credit matters.
To summarize, here are a few points on the advantages and disadvantages of credit:
• It’s convenient and safer than carrying cash.
• You can spread out payments over time.
• It’s helpful for emergency situations.
• Using credit can help build a strong credit history.
• You use credit to buy things you can’t afford and don’t really need.
• Taking advantage of special offers, such as, “no interest for 12 months,” without planning to pay the debt before the special offer expires.
• Failing to understand the terms of the lending agreement.
Now that you are clear on the benefits of one form of credit over the other, you can make wiser financial decisions. In another blog, we discuss the different types of credit and you can see there benefits of each type. You have the power now to realize how to work with what you have to build toward what you want. Whether your dream car, or dream home, if you cut spending and boost your score, you can make those dreams your reality.