Friday, December 28, 2018

Good Credit, Bad Credit, We Should Care

If you've shopped for any big-ticket item in Jacksonville (and other places in the US), then you've run across the stores that claim your credit score doesn't matter. Actually, it does, but so do the scores of others who shop at that store. Whether it relates to you or other shoppers, you actually should care about bad credit. I'll give you some scenarios that might help you understand why you should care.





Scenario 1 - Only Good Credit
I recently purchased a large-ticket item on credit. I had the cash, but the store was offering two years with 0% interest. That means I can invest my money elsewhere for 20-some months, hopefully making money on the deal. However, I had to be approved. The salesman came out and told me I was approved to buy anything in the store, but I wanted one of the least expensive items there. This store DID care about credit. If I was not approved, the store still would have sold to me if I used my credit card, but if I treated that purchase as a 24-month loan, I would owe hundreds more on the item over time. My limit was also dictated by my credit, but I am sure plenty of people with the best credit don't buy the most extravagant item. That's kind of how you establish the credit.

Scenario 2 - Competing Loans
When you buy a car from many car dealerships, you'll get more than one offer when it comes to loans. You might qualify for the 0% loan from the main lender, but the dealership might also do business with other banks (or other terms from the same bank). This is similar to Scenario 1. If you have great credit, you'll get the best offer (most money, least cash down, and lowest interest rate). Sure, the car dealership doesn't care if you have horrible credit, since there's still a horrible loan out there for you. Or maybe some kind of lease instead of a purchase. If you default on the loan or lease, the dealership or bank take the car back so that some other person with bad credit can overpay for the same car.

I never go to the stores that claim to NOT care about credit, since I figure they're building in some kind of protection into the price of all vehicles. I've also seen some evidence that people with bad credit are targeted with junkier cars. Probably because the loan companies that lend out to those with bad credit may also not have the same strict standards about what someone is getting with that loan. The fact is, I don't know. But somehow I'd rather deal with a company that intends to sell its big-ticket items to those who can afford those items.

Bad credit lending schemes basically encourage people who should be buying bus tickets or sleeping on an older mattress to go ahead and get that new item. Either the payments become too much to handle or the purchaser has to work more than anticipated. Lending institutions have generally given those people lower credit scores for legitimate reasons. There's no shame in waiting an extra year for a couch, buying it at a discount furniture store, and paying cash. If you have bad credit, sit on the damn floor until you can get to a thrift store with a Benjamin in your pocket. In 20 years of living on my own, I have spent less than $1,000 on major living room-type furniture, and that includes six couches, a love seat, and about a dozen easy chairs. Almost all of these had been used by someone else, and many had been left on the street by my neighbors. That's partially why I have the credit to buy anything in several furniture stores around town, not that I'm buying.

Scenario 3 - Everyone Must Pay
If the store does its own credit, then all of the buyers are paying for the people with bad credit to get approved. The store takes a hit when it loses, but it covers the cost by overcharging everyone who walks in the door. It's like that old adage that we all pay for shoplifters in the higher prices because of increased security or whatnot. A store that allows anyone with any credit rating to buy has to make sure those customers don't put the company out of business, and it probably starts with obscenely expensive loans for those people. But it's not like the rest of us are going to get a lot better terms at a store like this, since it's model is that many people will default on the loan, These stores might not even pay attention to credit scores at all. I once bought a car from a seedy used car lot that offered to finance in-house. I looked around the place and didn't even bother to check out the paperwork on such a loan. I had nearly perfect credit, but I probably would have been putting it in jeopardy using some kind of loan shark-like credit from an unscrupulous used car salesman.

Conclusion
The takeaways here are that those of us with good credit need to be very careful buying from places that claim they don't care about credit. Offering a loan is always a risk, and every store will try to minimize that risk. Also, if you have bad credit, you really need to wait to buy more stuff. Actually, if you have good credit, you should probably wait, too. When I was laid off unexpectedly, I had just bought a $15,000 car and a $3,000 car, both with cash I had saved. Had I financed newer versions of those cars at, say $30,000 each, I would have lost both of the cars in the matter of months. Neither car was new or all that wonderful, but they are still in the driveway, completely paid for. Besides your house and the occasional 0% offer you know you'll pay off, try to pay everything else off immediately. Then you'll have that good credit that some local businesses claim doesn't matter much.