Great Credit Shouldn’t Cost a Fortune


We all know the cheapest credit goes to those with the best credit. Zero percent interest on a car loan, the lowest rate on a mortgage, instant approval and 20 percent off at the register – those are money-saving deals that are offered only to consumers on the higher rungs of the credit ladder. Fair credit or poor credit consumers might be turned down altogether, but more likely will be offered financing deals that are far from advantageous. For these folks, extortionist fees, predatory interest rates and unforgiving penalties are the norm.

With all the fees and costs associated with poor credit products, how can a consumer move to good (or even great) credit without breaking the bank to get there? By paying attention, that’s how.

Save money while building credit  

Yes, savings should be part of your budget. You’ve already heard that advice, and it goes without saying.

Save actively: build your emergency fund so that you can handle life’s curveballs as they come. Even if it’s just $10 a month, do it.

Save passively: Avoid costly credit products and credit mistakes and you’ll have more to put into savings in the first place. The events that hurt your credit score the most are also some of the most costly. Pay all of your bills on time, every month. Not only will your score get a boost, you’ll save by avoiding late fees and penalty rates.

The real key to saving money on an ongoing basis while building credit is to be money savvy, starting right now, with all of your finances. The less you have, the more important it is to manage it well. Learn how to evaluate financial products and choose the best of the available options. Then, learn how to move into better options as soon as they are available.

First: choose only the right credit products

Be wary of easy credit. Instead, look for the right credit products. Any time you see “instant approval,” know that the reason creditors can be generous with credit is that the cost is so high they’ll make money no matter what. They already know that a percentage of high risk consumers will default on the debt, so everyone else with the product makes up for the loss in higher fees and costs.

In-store financing is designed to look appealing at the counter, but it really works best for consumers who have an immediate plan for payoff (in other words, people who don’t really need credit). Interest-free offers are really a bet that the creditor is making against you. They’re pretty sure you’ll still owe money (and pay interest) long after the initial offer passes by.

Second: watch out for fees

Look beyond advertised credit card benefits to understand the true cost of owning the card. Examine terms for annual fees, activation fees, maintenance fees and statement fees. Avoid them if you can. If you live near the U.S. border or you’re planning to travel, find a card with no foreign transaction fees (otherwise you’ll pay about 3% on each transaction). If you’re taking advantage of a balance transfer offer, find out what the balance transfer fee is (usually around 3%) and whether it’s a fair trade for the interest you’ll save.

Secured cards are popular among consumers with poor credit, and they’re not a bad option if you know how to find a good one. Watch out, though. Some secured cards come with eye-popping fees and are anything but good. Without shopping around, you could pay a $99 annual fee, a $125 new account processing fee and a $12 monthly servicing fee without ever even using the card! Fee-free secured cards do exist and your job as a smart consumer is to find a great one. After all, the credit limit is secured with your own money, so why not hold on to more of it and increase your spending power?

Finding a competitive credit card for bad credit isn’t difficult. For example, here’s a side-by-side of two secured cards available now. Which one would you choose?

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Sources: 1. 2.

Fees to avoid on any card include cash advance fees, returned payment fees and late fees. Those are all completely within your control and simply a waste of money if you incur them.

Third: approach credit responsibly

Credit scores are a reflection of your financial behavior over time. Approaching credit cautiously and responsibly will benefit you in the long run. Don’t rush out to get credit products you don’t need just because you think they’ll bump up your credit score.

You might have read that taking out a loan is a good way to build credit. The fact is that a loan costs money no matter what, so while you might help your credit, you’ll also hurt your wallet. Also, an outstanding loan affects your debt-to-income ratio and could negatively affect your ability to get other financing when you really need it. So don’t take out a loan just because. Wait until you have a need for money, and then borrow only as much as you need. If you think you’ll have a hard time qualifying for a loan in the future but want to be prepared to qualify, focus on setting money aside now to use as collateral against a secured loan in the future.

Posted in Credit 101
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