A credit score is your individual risk assessment profile. Incidentally, it also moonlights as a psychological profile of an individual and is used to penalize and limit the financial flexibility of those existing on the lower end of the credit scoring spectrum. We live in a capitalistic society where we are competing with and being awarded for our value each day. The credit score is one of the consummate representations of our value in this society. It serves to penalize and punish those who fall on the lower end of the score. Not surprisingly, people with low credit scores are typically poor people lacking both financial savvy and the ability to make timely payments. The effects of this are often long-term and fosters a diminished lifestyle. Let’s explore some of the reasons who high credit scores are beneficial and how the lack of it hurts the poor.
Benefits to Having Good Credit
- The opportunity at homeownership.
Low credit score will preclude you from home ownership as banks are reluctant to lend to someone deem risky as a lender. Your credit score is the biggest determiner in the mortgage application process and a bad score will completely shut you out of the opportunity to own a home. Certainly, there are other components to the approval process, such as the size of your down payment, your employment history and your debt-to-income ratio. Your debt-to-income ratio is also reflected on your credit score as it shows all your existing and outstanding debt. Homeownership when purchased smartly is the easiest way to wealth acquisition as the equity in the property can be accessed and utilized to purchase investment property or the property can be sold at the peak of the market and the homeowner realizes hundreds of thousands of dollars in gain that they would have never experienced in a rental property.
2. Low Car Insurance Premiums.
Insurance companies utilize credit scores in calculating car insurance premiums. The lower the credit score, the higher the premiums will be. This will sometimes be up to two hundred dollars on a monthly basis. Over a year, the individual would have given away thousands of dollars unnecessarily to insurance companies who operate on the premise that people with lower credit scores tend to file more claims. The savings in insurance premiums could have been added to a person’s saving account especially when Americans on average only hold nominal amounts in saving. Financial savvy requires minimal expenditure in all areas and greater savings to one’s bank account. Increased car insurance premiums as a result of bad credit is another way the poor is penalized by a system designed to keep the poor poor.
3. Subjected to Renting in a Lesser Area with Poorly Funded Schools
All apartment complexes will conduct both a background and credit check. At a certain score, people are precluded from being approved for residency. Even if approved with less than stellar credit, they are then assessed increased security deposits based on the risk factor presented by the credit report. Security deposits can sometimes be a full month’s rent or even twice the rent. Should the potential renter not be able to afford these additional fees, they are then relegated to a lesser property in a lesser neighborhood where the credit criteria for approval is less stringent. If you are a parent, your children could then be subjected to a substandard school system in a less nicer area since school funding is derived from property taxes. Where the property taxes are less, the schools are typically less funded.
4. Purchasing/Leasing a Car with Low to Zero Percent Interest Rate
While the two methods of acquiring a vehicle offers different benefits and one has to decide which best suits their individual needs, leasing is exclusively reserved for people with good credit. The monthly payment on a high-end vehicle on a lease is typically half that of a financed vehicle of a lesser make and model. The benefits of a lease then becomes the opportunity to drive a brand new vehicle while making payments as low as $200 monthly, often with zero interest rates. That is a substantial savings than one would find financing a car. Of course, the drawback is that you never own the vehicle and has to return it in a few years. One has to make that choice as often many people look to change their vehicles every five years anyway, especially if the warranty has expired. If one operates a business, many times the lease can be written off as a business expense which leads to the person essentially driving a vehicle for free (this is nuanced, since the business must be profitable and one will need to consult with a tax advisor). Financing a car typically comes with higher monthly payments but the owner owns the vehicle at the end of the finance period. If the applicant has bad credit, he/she will be subjected to subprime rates by secondary lenders. The interest rates can be as high as 18% which results in the applicant purchasing the car twice over after payment higher monthly premiums over five years. Bad credit is punitive and serves to keep the poor poorer as they expend more money on a monthly basis for the very things a person with good credit realizes vast savings on.
5. Access to Credit Cards with Rewards Used for Free Flights
Credit cards are a necessity to have in the event of emergencies especially when traveling. Additionally, many car rental companies and hotels require the usage of a credit card for booking. Good credit cards with low interest rates, cash-back rewards, reward points and high to unlimited credit limits, are not extended to people with bad credit, as banks assess their risks as too high. There are some credit cards for people with poor credit ratings. Those cards carry high annual fees, astronomically high interest rates and limited credit limits. Credit cards offer huge benefits when utilized wisely. Purchases should be made on credit to accrue points and rewards in order to be able to purchase flights and hotel stay with the points. To be able to travel for free on vacation is quite a benefit to be had just from utilizing credit. The key is to make the monthly payments in full prior to the accrual of interest. Unless for emergency, do not purchase anything on credit that you cannot afford, if your goal is to increase your credit score and practice financial savvy. Credit cards are only a liability for those who do not understand its proper usage. To use effectively, use for any and all kinds of purchases once the funds are available to make the payment in full at the end of the month. Otherwise, keep one functional card only for emergency use.
6. Personal or Business Loans
There are times when the opportunity arises where a lucrative business venture, or a deal of a lifetime presents itself. The individual may not have the cash to capitalize on the venture, but the availability of credit and the opportunity to secure credit from the bank or other secondary lenders can be the one factor that changes a person’s life. For many small businesses, a business loan is only secured with one’s personal credit. Even when the business itself establishes credit through the D&B (business credit bureau), the individual’s personal credit is almost always assessed in conjunction with the business credit. Until the business can stand on its own accord after establishing a track record, personal credit will be used to supplement the security of a business loan.
7. Job Opportunities
Today, many jobs extend the offer of employment contingent on good credit rating. The underlying idea is that the credit rating is a good indicator of the person’s sense of responsibility. Having a negative credit rating can preclude you from improving your life in so many diverse ways.
8. Investment Opportunities
All sensible projection of the real estate market expects the market to experience a full-blown crash in the coming years. Real estate has been experiencing a seller’s market for years where home prices have hit their peak. As the market experiences a leveling off and in some places, a slow decline, this will continue as the market reverts to a buyer’s market. During a buyer’s market, the home prices fall, and houses stay unsold on the market for longer periods of time. Savvy investors wait the market out until it hits the bottom where home prices are at their lowest, at which time they enter the market to purchase homes at their lowest prices. When the market crashes, many people will lose their homes to foreclosure due to realizing that they have lost their home’s equity and are severely upside-down on what is owed on the mortgage verses what the home is worth. The banks usually tighten their lending criteria and requests higher credit scores for loans and mortgages. Having a good credit score allows one the opportunity to capitalize on real estate deals during the turn from seller’s to buyer’s market.
In short, access to credit, otherwise known as Other People’s Money is the easiest way to wealth acquisition. Do not preclude yourself from access to funds that can be used to generate other funds and ultimately lead to financial freedom for you and your loved ones.
If you have made a mistake in the past not understanding the impact of your credit in building a better life and your score is low, it can be repair leveraging your rights under the Fair Credit Reporting Act. If you are ready for the level up, send us an email at TheNewblackorder1@gmail.comto start increasing your credit score and getting you back on track.