Bella:
Welcome to the How To Stop Being Broke Podcast, where the mission is to change your mindset about how you manage your finances so you can build a financial future that you can be proud of. My name is Bella Jones, and I am your host. So relax, sit back, and let's jump into today's conversation.
Bella:
Hey, hey, hey. So, in today's episode, I want to talk more about having bad credit. Now, I know this is a very taboo topic. We know that many people do, in fact, have bad credit. I mean, you might be one of them, but this is not something that we openly talk about. Having bad credit is something that has a very negative connotation. And, so, it is my mission to make it something that is not so taboo.
Bella:
Now, bad credit does not mean that you are a bad person. Your credit score does not define who you are. If you are currently dealing with bad credit, it may just mean that life has thrown some curve balls at you. You may have lost a job due to downsizing or an illness, and you did not have any money in savings. So then you had to make some tough decisions.
Bella:
Do you pay your monthly bills on time, like your credit card, car note, et cetera, or do you feed your family and keep a roof over your head? Well, the choice is obviously pretty clear, right?
Bella:
Or maybe you went through a divorce or a break-up and now have gone from a two-income household to a one-income household. And that is definitely a very hard transition to make. I, myself, have gone through this. When I was married, in my first marriage, I should say, and when we separated, I was in the same boat. Now, even though my ex-husband was paying child support, and he was an active parent, it was still hard. I do live in Long Island, New York, and it is very expensive to live here.
Bella:
At the time, I was living in a three-bedroom apartment and the rent alone was $2,000 a month, and that did not include any of my other monthly bills. And we also had two children that we were raising.
Bella:
So, after a few years of being on my own, I did have to move back home with my parents because it was getting to be overwhelming and just a bit too much to continue to pay that kind of rent, my other monthly bills, care for my children, plus trying to save for a down payment to purchase a home.
Bella:
Now, your bad credit may also just be a result of making poor decisions, which kind of goes back to having a broke mindset. Many of us were not taught how to manage money and the importance of credit, so we literally were learning along the way. We were not taught about credit, what it is, how it works, and why it is important.
Bella:
So, luckily, we are now in the age of social media, the internet, and other platforms. And, so, the information is easily and readily available, but this only matters if you're willing to learn and accept the information.
Bella:
Now, as someone who provides credit repair services, along with financial education, I definitely know that, generally speaking, people do not care about their credit until they actually need it for something, whether it is to apply for a job, finance a vehicle, rent an apartment, apply for a credit card. And, by this point, it is usually a bit too late. This is why I am so passionate about getting my clients, my students, and my audience to think about their credit before it is too late.
Bella:
So, if you are currently struggling with bad credit, all is not lost. Bad credit is not a life sentence. If you are willing to put in the work, you can eventually achieve great credit, but it is going to take time.
Bella:
So, this is why I want you to start thinking about and to start working on your credit, when you do not actually need it. When you do this, then you're not in any rush, so you have the time to put in the work and effort to improve your credit scores.
Bella:
Now, it is important to put in the work because you ideally want to put yourself in the best position possible to not only have your credit application approved, but to be approved at the lowest interest possible.
Bella:
Now, the reason why I want to make this distinction is because predatory lending is very profitable for these banks and lenders. Now, what is predatory lending? Well, it is when a bank issues a loan that they know the person borrowing the money cannot realistically afford. Many predatory loans, have high interest rates, high fees, and are designed to essentially keep you financially broke.
Bella:
Examples of predatory lending are payday loans, subprime car loans, such as Buy here, Pay here, and subprime mortgages. These products are specifically designed for people who have bad credit.
Bella:
Now, some might argue that these products are helping people with bad credit get the things that they need. So if you have bad credit, and you cannot qualify for a traditional car loan, then the Buy here, Pay here facility or lender gives you the ability to finance a car that you will need to get to work or school.
Bella:
At the surface, yes, I guess you can say these products do serve a purpose, but when you take a deeper dive, these banks really do not care about helping you purchase the car. They care about making money.
Bella:
So, let's change our point of view for a few minutes. So, we are no longer consumers, but we are now business owners. So you have the opportunity to invest your money in two different business models, so let's go through these one by one.
Bella:
So Option A is a stable business that has steady revenue and healthy financial statements. They are going to guarantee that you will earn 3% interest on your money over the next four years.
Bella:
Then you have investment Option B. So, this business is not as stable as Option A, but they do have a relatively steady and stable revenue stream, but their financial statements are a bit sketchy. But they are able to guarantee that you will earn 15 to 20% interest on your money over the next six years.
Bella:
So, which one would you go with? So Option A is a safer bet, but Option B is a more profitable proposition. So, banks will extend credit to people with good credit because it will provide a steady revenue stream, but extending credit to people with poor credit scores is profitable.
Bella:
Now, yes, they are taking a risk, in that you may not pay the loan back, but if there's an asset associated with the loan, they can always just take it back and hopefully sell it to recoup some of their losses.
Bella:
So when you look at business and finance and credit from a business standpoint, do you see how it is more profitable to lend to people with bad credit? And that is why they're always going to be willing to extend credit to you.
Bella:
So, you can see, these banks, they don't care about helping you purchase a car or to purchase a home. They are in the business to make money. You are essentially a means to an end. They don't care if you're going to pay thousands of dollars extra in interest. That's basically the penalty that you have to pay because you have bad credit.
Bella:
So let's look at an example. So if you decided to purchase a car for $10,000, and you qualified for a 3% interest rate, your monthly payment would be approximately $220, and you will pay $624 of interest over the life of the loan, if you were to do a four-year loan.
Bella:
Now let's say you took the same $10,000 car, but you have bad credit, so you qualified for a 20% interest on this loan. Now, your monthly payment will be $300, give or take, but you are going to pay $4,600 in interest over the next four years, or over the entire four years.
Bella:
So, you're more than likely going to finance multiple cars over your lifetime, so if you continue to finance these vehicles and with bad credit, you're going to be paying, and essentially throwing away, thousands and thousands of dollars over your lifetime.
Bella:
But when you go to finance these items, the banks don't talk to you about that part. They just talk about how they can get you into a car. They're giving you a great deal, so on and so forth, but they know what they're doing. They know they're charging you an egregious interest rate, but they don't care. They just want to pitch the idea of getting you into this car that they know that you need, even if you are possibly going to overpay for it, one, in the price. And, two, if you're going to pay extra money in interest because you have bad credit.
Bella:
So, we're just talking about car loans right now, and they are essentially just a tip of the iceberg. You are normally going to finance your vehicle, maybe over four to six years, right? But when you start talking about mortgages, and these are going to finance anywhere from 15 to 30 years, you are now talking about tens of thousands and hundreds of thousands of dollars, if you decide to apply for a mortgage with low credit scores.
Bella:
Now, the reason why I'm focusing on this right now is because I really hate the idea of you overpaying for anything. As someone who does work on credit, and I do consultations, and I have clients, et cetera. I really hate it when people ask me what is the lowest credit score they need to be approved for a mortgage because this is not the question you should be asking. And this kind of goes back to the broke mindset, because what we should be focusing on is what can we do to get our scores as high as possible, so we can qualify for the lowest interest rate?
Bella:
So, it is really time to start changing the narrative and focusing on fixing your credit, so you do not have to keep throwing your hard-earned money away.
Bella:
So, for those of you who are listening to this podcast, and you may be dealing with less than stellar credit scores, I really want you to do the following things.
Bella:
First thing, please stop applying for credit. When you have bad credit, and you're desperate to be approved for credit, you may potentially fall into the habit of continuously applying for credit and hoping that if you keep doing this, someone will eventually give you an approval. Please stop this madness.
Bella:
When you continue to apply for credit, when you have bad credit, you are literally digging into a bigger hole. Each inquiry is going to cause your score to drop a few more points. And then you have all of those inquiries on your credit report. It is absolutely going to be a red flag for any future lenders you may look to apply for credit with.
Bella:
Ideally, the only thing you should be applying for right now if you do have bad credit, is a secured credit card. Because when you use a secured credit card properly, it can actually help you improve your credit scores. Now, I will talk about this in more detail in a future episode, in regards to how secure credit cards work and how they can help you improve your credit.
Bella:
In the meantime, if you want to watch a YouTube video that I have done previously on this topic, I will put a link to that in the show notes.
Bella:
Now, the second thing you should be doing is looking at your credit reports to see where you stand. Ignoring your credit is not going to help you in the long run, especially if you are an aspiring first-time homeowner.
Bella:
Now, I know it is the last thing that many of us really want to do, but you essentially cannot change what you do not acknowledge. So, in order to start working on your credit, you need to know where your starting point is and to know what is really on there.
Bella:
So you can actually get a free copy of your credit report from all of the credit bureaus, TransUnion, Equifax, and Experian, for free, by going to the website, annualcreditreport.com. Now, I will put a link to that website also in the show notes below. So, you want to take advantage of this because as you are working on your credit, you really want to be on top of the changes as you are going along.
Bella:
And, one other thing, even if you have good credit, you also want to be mindful of what is on your credit report. So, you may not need to check your credit report every single week or every single month, but you should be looking at your credit reports at least once a quarter, so that essentially would make it four times a year.
Bella:
Now, the third thing you should be doing is creating a budget. By having a budget, it'll basically give you the ability to outline a plan to get yourself out of that financial hole that you are currently in. Your credit and your finances are not going to magically fix themselves overnight. So, you have to put a plan in place and become very intentional in how you're going to get things back on track.
Bella:
Now, I personally do use an app called YNAB, which stands for You Need a Budget. And it has been instrumental in helping me get my finances back on track and to essentially break that living paycheck-to-paycheck cycle. So, if you want to check out that app and software, I will put a link to that also in the show notes below.
Bella:
So, those are the three things you essentially can start doing today to start getting your credit and finances in order, because the sooner you start your journey to do this, the better it will be for you in the long run.
Bella:
Now, at the time that I am recording this episode, it is October 2020, and 2021 is literally around the corner. But I do not want you to wait until January 1st to start making these changes and setting these goals. That whole mantra, new year, new me is so overrated. You don't have to wait for a new year to set goals, right? You can take the first step today.
Bella:
So, I do hope you take this advice and this episode to heart, because I know, for myself, by starting my journey to fix my credit and my finances, it was the best decision that I made. Now, my journey started in 2014 and it took me two-and-a-half years to get my credit and finances in order. But fast forward now to 2020, I am in a much better place mentally with my mindset, right? And also when it comes to my credit and my finances. So I encourage you to start today because it will be the best decision you can make for yourself and for your future.
Bella:
So, I do want to thank you for, again, stopping by to listen to today's episode. Now, don't forget to reach out to me on Instagram, be it DM, if you do have any questions and I would love for us to connect on social media. So I will put my social media handles also in the show notes below. Take care guys. Bye.
Bella:
Thank you for listening to another episode of the How To Stop Being Broke Podcast. Now, if you enjoyed today's episode and look forward to future conversations, like the one we have today, make sure to subscribe, because it is time for you to stop being broke and create a financial future you can be proud of.