Improving Credit and Loan Products
There is a great deal of confusion about how the credit world works. I have been a financial adviser for 30 years and have had my own credit issues as well as many clients through the years. This article is divided into two parts: the first deals with the types of products out in the marketplace, how they differ, their pros and cons and the second part deals with improving credit.
In a nutshell, there are two type of credit: 1) Secured and 2) Unsecured. This means a loan may be collateralized by a home, car or other types of assets where the lending source holds the title until the loan is paid off or other types of credit such as signature loans and credit cards have no collateral. These latter types of credit are based on the credit worthiness of the borrower and not the value of the collateral. For example: personal loans with bad credit are unsecured.
In general a secured loan has a much lower interest rate because the lender has some security in the event of a default. More recently pawn shops have been preying on people with bad or no credit either by loaning against jewelry, tools, or guns and charging what amounts to 20% per month in interest. On the surface this sounds like a violation of the usury laws, however some types of lenders are excluded from this. Payday loans are similar in that the loan company will advance you money on your next paycheck if they can verify that you are going to receive one and charge 20% of the advance, even if it is for one week.
You can see that there are types of products to avoid if at all possible. The saying goes, “how can I build my credit if no one will give me any”. We will address this in more detail in the next section. It is VERY important that you keep the terms of your agreement and stay in contact with the lender in the event you have problems. Call them before they call you. This will show them that you are a responsible person.
Consolidation loans and are either accomplished by transferring high interest credit card debt from one with a high interest rate to one with a promotional rate that is much lower. Note that these promotional rates go away if you are late one time!
The secret to avoiding credit and debt problems is to be diligent in your management of money. Sometimes, life circumstances dictate whether you can pay all your bills due to unemployment, injuries, medical costs etc. Knowing this, people should try to keep their debt levels manageable. The first step in the process is to have a monthly budget and stick to it.
One must know how much is being spent and on what. Where can you cut back? Do you need cable, smartphones, or non-essentials. The next step is to pay off your credit cards each month or as soon as possible. Paying off a thirty year mortgage in fifteen years will save you a bundle and is not that much more each month. You may say that your loan is only 3.9% so why should I pay in off instead of invest the money in something else? The answer to this question depends on one’s personality and tolerance for risk. There is no set rule on paying off houses in my opinion.