What’s Your Credit Score?
It seems like we get asked that all the time. We see commercials on television asking us that question. “Do you want to live with Mom and Dad forever? Then you’d better learn your credit score!” It’s like it’s a badge of honor to have a high score, and we are told that we should all be striving to get there.
So, besides “What’s your number?” just what IS your credit score? Basically, it’s an algorithm that uses your past credit history to determine a number that credit institutions like banks and credit unions use to determine if you are good at paying your debts. Here’s a chart showing the numbers:
What does having a higher number say about you? It says that you are a good credit risk, that you are able to, and do, pay your monthly debt payments on time without being late and it tells creditors that you are not loaded up with debt to the point that you can’t pay it back, so it’s OK for them to lend you more.
We Live In A Debt Society
Debt has become our national way of life. It’s been that way for as long as I can remember, but it wasn’t always that way. Back in the first half of the 20th century people considered debt to be a bad thing. Now we embrace it like an old friend.
Back in the day you were considered foolish if you went into debt. Today you are considered foolish if you want to live debt free.
Do you want a new car? We don’t look so much at how much it costs, we look at how much the monthly payments are. If we can swing the payment, we buy the car. Thee or four years later, when we want a new one, we trade the old one in and start over again with new payments, and we think nothing of it. It has become our way of life. I’m as bad as the next person. I do it too, but that doesn’t mean it’s the best way. We tell ourselves that it’s how we can get stuff that we wouldn’t be able to afford otherwise.
Let’s Start With The Myths
Car Myth #1: You’ll Always Have A Car Payment
Dave Ramsey made a good point about continual car payments. He says it’s a dumb thing to do to start making car payments in the first place. For most of us, our car payment is second only to our mortgage payment. For most of us, once we start, we never stop and we make car payments for the rest of our lives. In his book “The Complete Money Makeover,” (which I’m reading for about the third time), Dave says the following:
The Federal Reserve notes that the average car payment is $495 over 64 months. If you keep a $495/month car payment throughout your life, which is “normal,” you miss the opportunity to save that money. If you invested $495 per month from age 25 to age 65, a normal working lifetime, in the average mutual fund averaging 12 percent (the 80-year stock market average), you would have $5,881,799.14 at age 65. Hope you like that car!
So, how can you get a car without going into debt for it? Here’s Dave’s suggestion: Put that $495 in a cookie jar for 10 month, and then buy a $5000 car. You don’t have to drive a $5000 car for you whole life, though. Just drive it for another 10 months while putting that $495 in the jar every month, and trade it in for a $10,000 car, and a $15,000 car ten months after that. That way in 2 1/2 years you can drive a paid-for $15,000 car without ever having made a payment, and you’ll never have to make a payment again.
Does anyone do that? Not very many of us, I don’t think. I wish I had in my early years.
The truth is that the average millionaire doesn’t make car payments, and that’s what helped her, or him, become a millionaire in the first place.
Car Myth #2: Leasing A New Car Is A Good Idea
Why do car companies offer leases? Because that’s where the money is. Consumer Reports says that leasing a car is the worst possible way to get one. Why is that? Basically you’re just getting a long term rental.
Example: (From Dave’s book) If you lease a $22,000 car for 3 years, and when you turn it in it’s worth $10,000, how is the $12,000 loss covered? It’s calculated into your payment, at $333 per month, plus you pay interest. Add onto that the charge per mile over the allotted miles and the charge for nicks and scrapes and excessive wear and tear and you usually have to write a check to get out from under your leased car.
Car companies now make most of their money with their credit services. We all have come to accept that.
The truth is that leasing a car is the most expensive way to operate a vehicle.
Car Myth #3: Zero Percent Interest On A Car Is A Good Deal
New cars lose 60% of their value in the first four years. That’s called depreciation and we ll know about it and accept it. That means a $28,000 new car will lose about $17,000 during the first four years of its life. That’s almost $100 per week of value that you are losing in those four years. What you are essentially doing is the same as rolling down your window and tossing out a $100 bill once a week.
The average millionaire drives a 2-year old car that he or she paid cash for. That’s how he or she became a millionaire. Slightly used cars are usually more reliable and have gotten the bugs worked out. Most are lease turn-ins with low miles and are good values.
So, What’s My Situation?
I drive a car that I bought new about a year and a half ago. I’m making the big car payment for the long term, like 72 months. Unless I can break the cycle, I’ll probably end up trading it in within another couple of years for another car. Maybe by then I can put myself into position to quit making the dumb mistakes.
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