Not Every Lender is Worthy
I am frustrated by people’s willingness to accept the options offered by Unworthy Lenders simply because those options feel easy. When did we lose all our backbone? And when did we decide that someone else had to right to dictate our realities?
Did you know that the type of credit you choose to use can negatively or positively affect your credit score? Yup. If you’re smart about the type of credit you use, you can influence your credit score, which will impact on the interest rate you have to pay. Put if you’ve made some bad mistakes in borrowing, it’s not as easy to fix as catching up your outstanding balances. Nope, credit black marks stick to you like gum on your shoe.
I saw direct evidence of this when I worked with one couple that had a fabulous income, but because of poor choices, also had a really crappy credit score. I knew they were in trouble the minute I looked at their creditor list and saw the types of credit they were carrying:
• loans from Last Chance Lenders
• credit cards that were at or over their limits
• way too much consumer credit relative to credit for assets.
It’s been estimated that the type of credit you use can affect up to 10% of your credit score.
Head into your local pay advance store, or borrow money from a Last Chance Lender and your score will go down because it looks like you might be a high risk and can’t qualify for mainstream financing. And if you have loans with really high interest rates that tells other lenders that you’re a bad risk and your cost of borrowing will go UP UP UP!
That’s one of the problems for people who feel their credit is spiraling out of control. They may take steps to fix the problem, but if they are the wrong steps, then their efforts simply make the problem worse.
The couple of spoke of earlier - that’s what happened with them. Once their debt seemed to become unmanageable, they decided to get a consolidation loan to make the whole miserable mess more manageable. But they borrowed from the wrong place… they ended up at a Last Chance Lender, which charged them over 28% interest on their consolidation loan. Ouch! Costly in terms of interest, and the impact on their credit score.
Using a credit card that you consistently pay on time and keep well below your limit will help your score. Installment loans, like a car payment, can also help your rating if your payment record is good and you have paid the balance down.
If you want to consolidate, but can’t find a reasonable interest rate, consider your debt management strategy. I ran into this again last week when one of my couples decided to approach their lender for a consolidation loan. While the going rate for unsecured loans was running at under 7%, their lender wanted to charge them more than double that — 13% interest. OUTRAGEOUS! I told them to tell their lender where to stick their 13%. They’ll have to fix their mess some other way.
There are always other ways. This is where the idea that this is your life and you can make decisions to be in control of it really becomes paramount. If you think you’re at the whim of any ol’ lender, then you give up that control. If you believe you can make choices that will end up serving you better, then you’re in control.
So how will my fam have to deal with this set-back. They’ll have to make more money or cut their budget back, so they can come up with the money to get themselves out of debt fast. Then they’ll have to be vigilant about doing the right thing until they’ve reestablished a good credit score.
The alternative - a consolidation loan at an high interest rate - may seem both smart and easier in terms of the cost to their cash flow (yes, their payments would be lower), but the long-term cost to their credit score, and the amount of interest they’d end up paying, makes it a dumb thing to do.
Sometimes, it’s not the clear-cut, easy path that’s the right path. Nope. Sometimes having to cut through the brambles and fight through the undergrowth gets you to where you want to be in better shape. It takes more work. It takes more courage. It takes more stick-to-it-ivness. And not everyone has the gumption. Do you?
April 29th, 2008 at 4:19 pm
I remember reading something from the Equifax and Transunion websites: one recommended keeping your credit card balance below 75% of total available credit, the other 50%. I think Gail may have mentioned 30 or 33% somewhere.
I remember reading elsewhere about credit card companies willing to give you a big available balance helped your score. I guess it is right… right?
Question:
If you use your credits card carefully (pay the balance every single month), is it better to let the limit go as high as the company will let it or is it better to keep it within your comfort and need level (in case of misuse by unauthorised individuals etc) credit score-wise?
April 29th, 2008 at 5:23 pm
Even in the way you phrased the question, you’ve shown you know the answer… “keep it within your comfort and need level” hunny-bunny. g
April 29th, 2008 at 5:58 pm
Marie, basically you’re getting at the idea of available credit, it is a kind of peculiar math that credit card companies use that makes people who have access to credit appear more credit worthy than those who don’t, even if the reality doesn’t actually change. Here’s an example.
Let’s say you have two credit cards, each with a limit of $5,000 and on card 1 you have a balance of $4000 and on card 2 you have nothing. And then you decide to cancel card 2, so that you can be responsible and focus on card 1 payments. Sounds good? But here’s how the math would work:
Initially, you’d have a balance of $4,000 out of $10,000 credit, or have used up 40% of your credit.
However, if you cancel and be responsible, you will now be using up $4,000 out of $5,000 available credit - or 80%.
In reality, nothing has changed for you in your day to day living, but your credit rating may nosedive according to their math.
Personally, to answer your question, *I* live with a high credit card limit but typically spend only $1,000 on it (paid every month so far anyway) and have only one credit card. However, in my younger days, I kept my limit under $2K as I didn’t want to be tempted, and lived quite happily and got mortgages, etc without a lick of problems. Just my two cents. And if I wanted something that cost more than $2K for travelling or wanted points, etc, rather than call to have my limit increased, I’d just overpay my account so I’d get a credit, and then it would go through. (Yes, this would mean I’d be making an interest-free loan to the bank, but only for a day or two).
P.S. Gail — Please, please, please on your show give someone a cheque for $0.000 — the goose-egg. At least the dog people from last week — they deserved nothing. In fact, you should have billed them for your time!!!! g
April 29th, 2008 at 6:11 pm
Marie, I have been debating the same issue, too. But how do we know the limit that we should be keeping? Now, my one and only credit card gives me a credit limit 3 times of my monthly salary after tax. My salary doesn’t justify that I should have such a credit limit at all. And I have been debating that I should call the bank and put a cap on the limit. But then, like you say, if we use the card carefully, it shouldn’t be a big concern.
I’m interested to know what factors would make banks increase your credit limit on your cards without asking? The last time my credit limit was raised was during the time I was between jobs (just graduated from school, worked for 3 temp agencies at the same time. No steady income at all!). What kind of risk they are taking?
April 29th, 2008 at 6:34 pm
my mother in law is on disability. growing up in communist hungary, she is thrifty and can stretch a dime into a dollar any day. but given the fact that she has $50 a month of disposable income after necessities are covered, she has been given a 10K limit on her visa, which she laughs at and is frequently harassed by the bank to give her an additional 10k LOC! we find this funny as given her background she never spends a penny more than she makes, but come on!!! of anyone they’ll give one to, seriously!
has anyone on the show ever received nothing? i can’t think of anyone now. where does the remaining money go? i suppose if someone deserved nothing, perhaps donating their share to a charity in their name would hit home a tad?
April 29th, 2008 at 7:06 pm
Credit card “benefit”: you qualify for a payment holiday, if you cannot make payment, there is no need to notify us … financing charges will apply!
I really don’t want to given them money! I hope nobody falls for it…
Angela: I capped and then some reincrease the limit later and some respect the cap. I don’t know how they decide to allocate credit other than possibly making the minimum payment on your salary …
I prefer the comment from the sub-prime crisis:
This crisis proved one thing, those you couldn’t pay before sub-prime was available couldn’t pay sub-prime was available!
(I forget where I read that)
April 29th, 2008 at 11:02 pm
I work for a major bank and it amazes me how many people give no thought to what they are borrowing or from whom. I am a loans officer and so many clients have loans with “last chance lenders” and when I ask them why they went to that company they don’t know why - it was convenient I guess.
I also see a lot of clients who have tons of credit with other lenders and carry no balances and then call looking for MORE credit from us. When I can’t offer them more they are so offended. People need to understand that credit isn’t so simple. Just because you don’t use the other cards, doesn’t mean they don’t matter. If you charge those other cards up - chances are you’re not going to be able to pay the other lenders if you have too much credit.
I think it’s so important to take the time to call your bank or advisor and talk about how you use credit and what would be the best products for you. Just because a card has rewards doesn’t mean it’s the right card for you etc.
Thanks for letting me vent! it was a tough day of lending today! : )
April 30th, 2008 at 9:29 am
I know this is probably really baic but how do you check your chedit score? I have no idea. I have never had any porblem getting credit and have a few cards that I don’t use with $0 balances but it woudl be nice to know what the score really is.
April 30th, 2008 at 3:29 pm
Hi Susan,
Assuming you live in Canada, you just go to either http://www.transunion.ca/ or http://www.equifax.com/EFX_Canada/consumer_information_centre/overview_e.html .
There’s your credit report or your credit score plus credit report. I think the report is free, but you are charged for the score.
I believe both companies calculate the score differently, so you may not have the same score with both, but they will be really close.
Hope that helps! (But remember, the score only matters if you actually want credit… )
April 30th, 2008 at 7:04 pm
Susan, Practically every question you have is located somewhere on this site. The information is located at: http://www.gailvazoxlade.com/articles_f/article31-6.htm
May 1st, 2008 at 11:02 am
Thanks Kelly and Wanda. Great help!
June 20th, 2008 at 11:22 am
I just received unsolicited correspondence from HSBC Finance with respect to opening a line of credit and consolidating my debts into a single payment (instead of managing multiple bill payments). I am following Gail’s advice and am currently paying down my consumer debt and would not take this anyhow. BUT - for the sake of making one payment per month instead of multiple payments - they are charging an interest rate of 29.99% What are they thinking??? Unbelievable!!!!