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Credit: It’s Your Choice Easy Street or the Hard Road

Credit Wise (featured column)
by Jennifer Wallis

Even though we all live on this planet together, your credit rating can make a world of difference in the life that you lead. It’s simple to take for granted how deeply the credit decisions you’re making now will affect you for years to come.

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While credit mistakes don’t have to haunt you for the rest of your life, the choices you make now will be the compass that points you toward either Easy Street or the Hard Road for at least the next seven years. There are two paths you can go by and the choice is up to you.

Life on Easy Street

Let’s say that you have handled credit perfectly. As a young adult, you obtained a couple of credit cards and loans. You paid them back exactly on time and maybe even sent extra money to get them paid off early. You have never been at the limit on your credit cards and have never become overextended. You have built a credit record that tells potential lenders that if they lend you money, you can be trusted to pay it back. Lenders dream of customers like you so this will give you access to Easy Street when it comes to getting future credit.

Credit card companies pay millions of dollars to obtain lists from the credit bureaus of clients who have borrowed money and have paid it back as planned. They will fill your mailbox with pre-approved credit card offers, promises of platinum cards with 7% fixed interest rates, and will offer free gifts just for borrowing money from them.

Easy Street is lined with car dealers who will give you great car prices and low (sometimes around 4%) interest rates. Credit unions and banks welcome you with open arms and offer personal loans at 6% interest when they catch a glimpse of your outstanding payment history.

On Easy Street, it isn’t a matter of whether you can obtain credit or not; It’s a matter of which lender is willing to make you the best deal. They will be competing for your business. This position allows you to shop around and take advantage of the best deal. It also allows you to borrow money for much lower interest than someone with less than stellar credit.

Lessons Learned on the Hard Road

Now let’s assume that your credit isn’t so perfect. Maybe you were started off on the right road but circumstances were beyond your control and a divorce, job loss, or medical problems changed your course. Now, you find yourself with a track record of late payments, outstanding, unpaid debts and maxed out credit cards.

Your credit report shows the mistakes that you have made and now you find yourself on the Hard Road.  Lenders see you as a higher risk because they can’t be sure that you will pay them back if they lend you money.

Life on the Hard Road is a lot different than Easy Street. While you will most likely still be able to obtain some credit from lenders who target “high risk” borrowers, the interest rates will be a lot different. While a person with excellent credit may pay 7% interest on their credit cards, the best you may be able to get is 23% interest.

Some credit cards that cater to people with damaged credit may even require a deposit as collateral. The Hard Road is full of car dealers who will charge you thousands over the blue book value of the car, require $1000.00 cash down and provide “special financing” at 21% interest. Credit Unions and banks may not be able to lend you money at all.

If you need to borrow money, there may not be many more options that the small loan companies. These companies specifically target  “high risk” borrowers and charge as much as 421% interest.  When you’re headed down the Hard Road, your options are limited. If you need to borrow money, you don’t really have much choice but to borrow it at a much higher cost than someone with good credit.

The Real Difference

You may wonder if a few interest rate points really make that much difference. Let’s say that Bad Credit Bob owes $5000.00 on a credit card and takes 5 years to pay if off. His interest rate is 23%. Bob will pay approximately $3457.14 in interest compared to $940.36 that he would have paid if his interest rate were 7%. For having some blemishes on his credit, Bob paid $2516.78 more to borrow the same $5000.00 as someone with great credit.

For this example, in addition to the credit card Bob also buys a car at $10,000 for 3 years at 21% interest. Bob will pay $3563.02 in interest compared to $628.63 if Bob were able to finance that same car at 4% interest. Bob’s bad credit rating just cost him an additional $2934.39.

Because Bob wound up taking the Hard Road, he paid $5451.17 more than he would have paid on Easy Street. As you can see, interest rates really do matter and those few points add up to a significant amount of money.

There’s Still Time to Change the Road You’re On

If you find yourself with damaged credit, you can always turn things around. While the road might be a little bumpy for a while, it will eventually smooth out once you start to rebuild a reliable credit history. Here’s where to start:

Get your credit report:  You may just assume that your credit is bad but unless you see what the lenders see, you will never know for sure. If you have been denied credit in the past 60 days, you are entitled to a free copy of your credit report. If not, you can obtain one at Equifax.com.

Pay off old debts:  Remember that everything stays on your credit report for 7 years from the date of last account activity. If you have old collection accounts or charged off accounts, pay them off as soon as possible. They will still appear on your credit report but instead of showing a balance, they will show that they have been paid.

Pay current debts on time:  If you have made a few late payments over the years, it’s very important to start paying on time now. Even though your credit history is reported for 7 years, many lenders weigh the last 2 years more heavily because it tells them how you’re doing most recently. Even though you may have had problems in the past, you may be able to get better consideration for showing a recent responsible payment pattern.

Simplify bill paying:  If you have trouble keeping up with your due dates, set up a calendar to remind you of when bills are due.  It may also help to pay online because they will send you reminders of when your bills are due. Personally, I find it easiest to pay my bills every two weeks on payday.  That way, everything is paid early and I know how much spending money I have until next payday.

While it may be easy to assume that your credit rating doesn’t really matter, the fact is that it does make a difference. If you’ve made mistakes in the past, it’s important to become better educated about how to be a good money manager. You may not be able to change your past but the future is completely up to you. As someone who has taken both roads at one time or another in my life, I can tell you Easy Street is a much smoother ride.

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Copyright © 2004 by Jennifer Wallis. All rights reserved.

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