Credit and Credit Scores: A short lesson

[jman220]

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Who gives a crap about your credit score? Pay cash for all, live without debt, and you're set. This is one of the craziest thongs out there. Being concerned about your credit score so you can be in debt forever.

Anyone heard of Dave Ramsey?

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For most of us, we need a good credit score to get good home loans, car loans

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Why not buy a car with cash? Why not live within your means and save up? why make monthly payments on something that does nothing but lose value?

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Now you're just trolling.

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I dont mean to. But, these people are talking like they need to get a car loan. Yeah, you need credit if you plan on buying everything you own on installment plans, but please explain why it makes sense to buy a car with credit?

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Because the utility value of money decreases over time?

[punkass]

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I dont mean to. But, these people are talking like they need to get a car loan. Yeah, you need credit if you plan on buying everything you own on installment plans, but please explain why it makes sense to buy a car with credit?

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Many people don't have tens of thousands of dollars saved up. And for a lot of people, a car is a necessity to get to work. So they take a loan to buy one. Now, if people were smart, they'd buy an affordable used car that cost a couple thousand so they'd be able to pay it off in a short period of time. But of course, many buy expensive new cars that they pay over 3+ years at bad rates. This is obviously a bad idea.

But home debt is a smart move for most people who don't have the cash to buy a home before the age of 60. Education loans are smart since you are able to repay these loans after you graduate at very good rates. And loans to start businesses is pretty much an investment rather than a debt.

Your blanket statements of "pay cash for all" is unrealistic for most people under uber-wealthy status.

[jman220]

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I dont mean to. But, these people are talking like they need to get a car loan. Yeah, you need credit if you plan on buying everything you own on installment plans, but please explain why it makes sense to buy a car with credit?

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Many people don't have tens of thousands of dollars saved up. And for a lot of people, a car is a necessity to get to work. So they take a loan to buy one. Now, if people were smart, they'd buy an affordable used car that cost a couple thousand so they'd be able to pay it off in a short period of time. But of course, many buy expensive new cars that they pay over 3+ years at bad rates. This is obviously a bad idea.

But home debt is a smart move for most people who don't have the cash to buy a home before the age of 60. Education loans are smart since you are able to repay these loans after you graduate at very good rates. And loans to start businesses is pretty much an investment rather than a debt.

Your blanket statements of "pay cash for all" is unrealistic for most people under uber-wealthy status.

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Oversimplifying and stating that you should never "spend more than you have on hand right now" completely ignores the current utility value of money to you. If you're a young professional just getting started who isn't making much money yet, money has a much higher utility to you now than it does 10, 20, or 30 years from now. Therefore, even, for example, paying 6 percent interest on your car loan for 6 years doesn't necessarily mean you're actually losing utility by paying more over those 6 years then if you paid for the car upfront. The same goes for a 30 year mortgage. $250,000 right now probably has a higher utility value to you then $400,000 over the course of 30 years. This is to say nothing of the effects of inflation, etc.

Edit: However, it never makes sense to carry a credit card balance. Ever. There are just better forms of loans out there if you need them.

[milliondollaz]

Bartman,

I can see your point about using credit for things that depreciate, like a car, but it might help you get laid, ya know? Good point though.

All,

Debt is a wonderful thing to use for investment purposes. Example, you buy a house for 100 grand and it goes up 50% in value. You make 50 grand. OR you put 100 grand down on a loan and by a house for 1 million. It goes up 50%. You are now at 500 grand - 100 grand - interest, (which hopefully will be less than 400 grand).

Same thing with stocks, and businesses. 10 grand investment for www.bobsfunnyvideos.com. 100 grand investment for www.youtube.com. What if you had to "borrow" that 100 grand. Pocket 1.64 billion. cha-ching.

[Bartman387]

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I dont mean to. But, these people are talking like they need to get a car loan. Yeah, you need credit if you plan on buying everything you own on installment plans, but please explain why it makes sense to buy a car with credit?

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Many people don't have tens of thousands of dollars saved up. And for a lot of people, a car is a necessity to get to work. So they take a loan to buy one. Now, if people were smart, they'd buy an affordable used car that cost a couple thousand so they'd be able to pay it off in a short period of time. But of course, many buy expensive new cars that they pay over 3+ years at bad rates. This is obviously a bad idea.

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So why are you arguing with me? This is exactly what I'm talking about, buy a an reliable used car for a couple grand rather than leasing a 30k car that you have no business owning.


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But home debt is a smart move for most people who don't have the cash to buy a home before the age of 60. Education loans are smart since you are able to repay these loans after you graduate at very good rates. And loans to start businesses is pretty much an investment rather than a debt.

Your blanket statements of "pay cash for all" is unrealistic for most people under uber-wealthy status.

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I didn't mean to generalize into the home and student loan area, I do agree that these are good, I've taken advantage of them myself, and I know little about business loans, so I wasn't thinking in this area.

But, too many people buy too many things, especially on credit, simply because they feel they need it and never consider if they can afford it. As a recent grad who has only incurred student loan debt, I don't see it being as impossible as most seem to think.

[punkass]

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I didn't mean to generalize into the home and student loan area, I do agree that these are good, I've taken advantage of them myself, and I know little about business loans, so I wasn't thinking in this area.

But, too many people buy too many things, especially on credit, simply because they feel they need it and never consider if they can afford it. As a recent grad who has only incurred student loan debt, I don't see it being as impossible as most seem to think.


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Since you said that you should have to worry about your credit score since you should pay cash for everything, I took your stance as pay cash for everything. Your credit score is very important when getting a home mortgage. Getting a mediocre rate sucks when you have it for 30 years (or even 5 years).

I think we all agree that carrying credit card debt is horrible.

[RunDownHouse]

Bartman,

As a rational person, I'm all about smoothing my consumption curve. I'm not borrowing money I "can't afford" or buying things "I don't need." I'm spending more now - yes, sometimes on what you'd consider luxuries - because I'm assuming that my income is going to increase, and sharply. Obviously I can't borrow enough to buy a mansion or anything, but there's also no reason for me to move into my mansion when I can afford it at 60 and spend the intervening years in a hovel, eating ramen and biking to work. Ideally, while my income curve increases sharply before leveling out in the 50's to 60's, my consumption curve will be a bit smoother, exceeding my income in my youth and vice versa in my old age. Lots of other people are telling you the same thing, or something related (decreasing utility of money as you age). Again, its not about overleveraging, its about borrowing enough so that your standard of living is absolutely higher during your life than it would be otherwise.

JB,

The number financial planners/advisor will throw at you for debt/income ratio is that your debt payments shouldn't be more than about a third of your monthly income, not including housing costs and maybe student loans. Obviously, the "perfect" ratio for you will differ based on personal circumstances - like the expectation of future income, geographic location, etc - but that sounds like a good starting place to me.

[Lestat]

Well, I'm in my forties now and there's an account I defaulted on when I was 19, which is still on my credit report as well as all the accounts that were paid off in good standing. So when do ya think these accounts will fall off? By the time I'm 90?

[bobman0330]

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Who gives a crap about your credit score? Pay cash for all, live without debt, and you're set. This is one of the craziest thongs out there. Being concerned about your credit score so you can be in debt forever.

Anyone heard of Dave Ramsey?

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Mortgage interest deduction...

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You pay more in interest than you get back on a deduction. But if you want to send me 10k, I'll send you back 2.5k and call it even.

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That's dumb. The point is that if you can't afford to buy a house outright, it's much better from a tax perspective to buy a house and get a tax break than to pay rent and not.

[Bartman387]

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Who gives a crap about your credit score? Pay cash for all, live without debt, and you're set. This is one of the craziest thongs out there. Being concerned about your credit score so you can be in debt forever.

Anyone heard of Dave Ramsey?

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Mortgage interest deduction...

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You pay more in interest than you get back on a deduction. But if you want to send me 10k, I'll send you back 2.5k and call it even.

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That's dumb. The point is that if you can't afford to buy a house outright, it's much better from a tax perspective to buy a house and get a tax break than to pay rent and not.

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The mortgage deduction is often a reason given for not paying off your mortgage, I figured this was what he was referring to. If the deduction was a reason he was giving for taking out a mortgage I was a bit off I guess, but stating only the deduction as a reason to get a mortgage is dumb. You can get that same deduction donating money.