Why Easy Credit Sucks

One of the easiest ways to understand why more young American adults have debt rather than savings is simply this; while it can take an entire year to save $1000 if you put $20 a week in savings, opening a credit account with $1000 in credit takes only a few minutes and can be spent in less than a day.

The problem is, while “easy credit” is an expression used every day by consumers around the country, no one talks about “easy savings”. In fact, according to a recent study by Bankrate.com, nearly one out of four American consumers have more credit card debt then the amount of money they have in an emergency savings account, which is not very good at all.

Younger consumers have even more of a challenge due to a number of things, including student loans, young families and the perceived need to “be hip”. Those include subscription services to called brands for things like beauty supplies, lifestyle products and so forth, which can easily run between $10 a month to $50 a month.

One of the bigger problems is also that many young Americans are now staying in their parent’s home longer, which means that they have a lot less bills to worry about and, instead of putting their money into savings where it should be (and where it can earn compound interest for a much longer period of time) they end up spending most of their money on socializing, consumer goods, electronics and so forth.

Indeed, setting aside an emergency savings plan to cover 6 to 12 months of bills, something highly recommended for consumers young and older alike, can seem as impossible as putting aside $1 million. Even putting aside an amount of money as small as $20-$25 a week can be overwhelming for some young consumers, due to either overwhelming bills or the fact that they simply don’t realize how much money they’re actually wasting.

Another fact that goes over the heads of most young consumers is that credit card debt comes at an extremely high cost. The average interest on credit cards is just under 16% and, on a $2000 credit card bill, would take over 10 years to pay off if only the minimum amount was paid every month. Not only that but, by the time it was paid off, the young debtor will have spent nearly $1400 more in interest payments.

The real failing goes back to both school and parents, neither of whom are teaching young people the benefits of being frugal, compound interest and having money set aside “for a rainy day”.

Instead, banks bombard young consumers with offers for credit cards that, in most cases, is like waving a steak in front of a hungry bear. It’s very difficult to keep that bear from getting that steak, and just as difficult to keep young consumers from making the mistake of opening a new credit card and quickly maxing it out.

The Hidden Costs of a Long Term Car Loan

Approximately a quarter of all new car loans today are for at least 5 years, and some stretch to 6, 7 and even as long as 8 years. The reason that more and more consumers are getting these longer loans is simple; they allow for lower monthly payments and let someone who might only have been able to purchase a used car, or a much cheaper model, buy a fancier, more expensive car instead.

Edmunds.com, a research and car shopping website, says that the average new car/truck alone is 67.2 months, the longest it’s ever been, but it’s easy to find lenders will go for 84 months or even, amazingly, 96 months.

While the monthly payments might be lower, the fact is that, in the end, the overall cost that a consumer will pay for a long term car loan is much more than the same car will cost for a 2, 3 or even 4 year loan, for a number of reasons.

The fact is, on longer term auto loans the interest rate is usually higher because they’re considered more risky.  For example, using 5%  interest (which is still pretty good for a long-term loan), if a consumer took out a $30,000 loan for 84 months, they would pay $3700 more for their car than someone who purchased the same $30,000 car for 48 months at 3%.

Another problem with very long term loans is that, by the time a consumer gets to the sixth, seventh or eighth year of the loan, they could be paying more than the car is actually worth. According to Eric Lyman, vice president of industry insights at ALG  (they’re the unit of TrueCar.com that forecasts depreciation) “The longer the loan, the further out is until you have positive equity.”

Until this change to positive equity actually occurs, meaning that you have a car that is worth more than what you still owe on it, if you go to trade in the car for a new one, your trade will have zero value.

What makes the situation worse is simply the fact that cars depreciate much faster than other major purchases. For example, by the time an automobile is three years old, it’s worth only about 50% of what it cost new.  That means a $30,000 automobile would be worth approximately $15,000 when it becomes just three years old and, if you owe more than that when it does (which is highly likely if you have a car loan longer than 5 years) buying a new car will mean taking out an outsize loan big enough to pay off the old one and purchase a new one.

Another problem arises if you get into an accident and total your car, because most insurance covers the value of the car, not what you still owe on your loan. That means that, if you owe $25,000 on your car, but it’s only worth $20,000 because of it’s age, you’re going to get $5000 less than you need to replace it if it gets totaled in an accident.

At the end of the day car dealers and banks realize that most consumers don’t look at the end cost of their new car, but simply at the monthly cost when they’re making a new car buying decision. They know it’s a bad idea, but since they’re selling cars and making money, you can bet that they won’t point out that fact to consumers.

If that consumer happens to be you, the best advice you can follow is to take out as short a car loan as possible and, if the payments are too high, purchase a car that costs less rather than taking out a longer loan.

Top Tips for Lowering the Cost of Lighting your Home

About 15% of the electricity used in the average American household is used for lighting, which isn’t the biggest expense by far but is definitely one that can easily be lowered. In today’s blog we’ll look at a number of great Tips that you can use to not only lower your electric bill also save energy at the same time. Enjoy.

First of course are the new Energy Star light bulbs that use approximately 75% less electricity than those old fluorescent twisty lightbulbs that have been around for decades. In fact, some of the newer models look exactly like the old, traditional incandescent models,  except for the fact that they last 10 times longer. You can now clip a lampshade onto them, which is helpful for the millions of lamps people are using all across the United States that are set up this way.

Now, to be sure, these new bulbs do cost a bit more than their older, incandescent counterparts. Since they last so much longer however, and use so much less electricity, you’ll actually save money in the long run even though the initial cost is a bit higher.

Once you’ve changed out your bulbs, the next thing you need to do is not leave them on when you aren’t using them or in the room. The fact is, millions of people all over the country leave lights on during the day when they’re not even home, or all night long, in rooms that are even being used. That’s not just wasteful but also increases your electric bill every single month.

For example, leaving the lights on your garage, in the basement or at the front door is a complete waste. You would do well to install motion sensors in those areas so that, when you walk in, the light turns on but, after few minutes, they turn off automatically. These are great for the front door as well for when someone comes to visit, so that they won’t be standing there in the dark. (It’s also a great way to scare off burglars.)

Inside the house you can also use timers if you want to leave lights on for safety, but don’t want to leave them on all day long as well.

There are also a number of solar power options available today that will collect solar energy during the day and then, at night, light up bulbs along your driveway or a path through your yard. These are great for patios as well and, even though the initial cost is there, they don’t draw energy off of your home’s electric and will pay for themselves in a couple of years.

And there you have it, a number of great tips that will help you to save electricity, save energy and lower your electric bill. Put them to good use and you can save upwards of $2-$300 a year.

The Different Types of Loans and How They Affect Your Credit

Most people believe that, when it comes to debt and credit, all debt is created equal. They think that mortgage debt is categorized in the same way as credit card debt and that, the reason mortgages are harder to get than credit cards is because of the amount of money being loaned is larger than that of a typical credit card. This is not true.

There are several different types of credit and loans that a person can apply for and obtain. Each of those different types of credit is weighed differently.

Installment Accounts

Installment accounts are sometimes called “closed end” accounts. These are loans or lines of credit that come with a definite “pay in full by X” date. The most common types of these loans are mortgages, car loans and student loans. These are weighed heavily on your credit score and are scrutinized by banks and other creditors and lenders because they tend to be larger. The larger the loan the more your debt to income ratio comes into play. How you perform with one loan could very well determine whether or not you are approved for the same type of loan in the future.

Revolving Accounts

Revolving accounts are often called “open ended” accounts. These are credit cards, store lines of credit, etc. These are debts that can be carried, well, forever if a person manages them well. Unlike a mortgage which is for a set amount and that must be paid in full, with every payment working to bring the loan amount to zero, a credit card is more flexible. A line of credit can be increased or decreased and every payment made goes (after interest payments) toward restoring the amount of credit available to the credit holder.

These are also very closely scrutinized by banks, lenders and creditors. In fact, the credit bureaus and other lenders/creditors often give these types of loans and lines of credit more weight than the larger installment plans like mortgages and student loans.

Why?

It’s All About Collateral

When you take out an installment loan, it is usually to get something incredibly valuable like a home or a car (an education is the exception that proves this rule). If a person fails to pay these loans properly and on time, they risk losing that possession. Defaulting on a mortgage will result in foreclosure and having to find a new home. Defaulting on an automobile loan will result in having the car repossessed.  Because of this, most borrowers make installment loans their highest priorities. They almost always pay these properly because they don’t want to wind up homeless or without a means of transportation.

Revolving accounts, on the other hand, are the first to be put off in favor of installment plans, food, and other expenses. While people’s intentions toward them might be good, they rarely fly into a panic at the idea of being a few days late on a payment.

For many banks and creditors, it is how people handle these “optional” payments that tells them what they need to know. If a person has a perfect record on their mortgage but has a dozen credit cards in collections, they are unlikely to be approved for future loans and their credit scores will likely be low. They may be so low that getting even small unsecured lines of credit become impossible.

This is when, if you are in financial trouble you might be tempted to turn to two other types of loans. One of these will have an impact on your credit score, the other likely will not.

PayDay Loans

PayDay loans are predatory loans. They are short term loans that come with outrageously high fees and terrible interest rates. They are designed to keep borrowers dependent on them for survival. For example, taking out a $50 PayDay loan will usually cost you at least $75. $50 goes to pay back the loan and the other $25 is for the fee you pay for the “privilege” of short term borrowing. If you fail to pay the loan back on time, the lender will likely tack on another $25-$50 or even more on top of what you already owe. So, even if you are just a day late, you could wind up paying $125 to borrow $50. Many states have banned PayDay loan companies from operating within their borders because of the lenders’ predatory practices.

Consolidation Loans

Consolidation loans, on the other hand, are usually viewed the same as any other installation agreement…if you apply for and use them privately. A consolidation loan, when borrowed privately, is usually borrowed as a private loan. Lenders do not care what you used it for, as long as you pay on it responsibly (though they will be able to see how your debt shifts from one account to another).

If you go through a consolidation service, however, this may have an affect on your credit score. This is because credit consolidation companies usually work simply as “middle men.” You pay them one lump sum and then they distribute that payment across your accounts.

A Quick Word About Credit Repair

If you have a lot of loans or discharged debts or credit accounts on your report, that can also be a huge ding against your score. While it is true that very few things stay on your credit history and report forever (like student loans), it is also true that you not have to wait for them to fall off naturally. Some people work with their previous creditors and lenders to have closed accounts removed from their records. According to a video from the Creditrepair.com YouTube Channel, some people have great luck hiring a credit repair service to help them get rid of mistakes and other bad data–like an installation agreement that has been classified as a revolving account, which can help raise their credit scores and improve their credit histories.

Understanding the difference between the different types of loans and credit is a big part of solving your credit score puzzle. Use the information contained here to help you get started!