Why Should I Learn How to Improve My Credit?
by J.M. Boyd, Accountant
As an accountant, I know that what often separates wealthy people from poor people is real estate ownership, and the only way for the working class and middle class to build wealth if they don't have extra money is to buy a home so that the money they are paying towards rent (to someone else) stays in their own pocket, so to speak, and their property appreciates over the years and someday they get to own the house without a mortgage.
Think about it -- if you pay rent to someone else every month -- a big chunk of your monthly earnings goes to someone else and you have absolutely nothing to show for it -- you're just working as a slave for someone else who is getting wealthier off of your labor. And this is where learning about credit comes in. So many of you reading this now can't qualify to buy a home either because you can't come up with the down payment and/or your credit is really bad. There are solutions to both problems. In this article, I'm going to deal with your credit problems because home ownership is the way to start building wealth and get out of the hole you're in.
When most Americans buy a house or car they are completely obsessed with an affordable monthly payment and nothing else. Too many Americans are so grateful just to be approved for a home loan, that they will take any terms offered to them, although most of the time, the terms greatly favor the lender and not the borrower. And if your credit score isn't what it could be, you're going to pay dearly for that house and deprive yourself of the opportunity to create a tremendous amount of wealth -- and I'm talking about retiring with hundreds of thousands of more dollars in your bank account than you would otherwise.
Since I'm an accountant, I'm going to illustrate what I'm talking about by doing some number crunching, and I hope it will shock you in to doing everything you can to improve your credit rating.
Today is June 4, 2020 and I went to WellsFargo.com to look at the current mortgage rates for various types of home loans. The lowest rate listed today is an APR of 3.228% for a 30 year mortgage (the most common type). People who qualify for the 3.228% interest rate usually have to have a FICO credit score of 760 or above. If your credit score is lower than 760, you aren't going to get that rate. Your rate will be a bit higher. The lower your credit score, the higher the interest rate will be, and if your credit score is too low, of course, they won't even give you a mortgage at all.
But for my illustration, I'm going to compare what two people with different credit scores would pay for the exact same house: a four bedroom, red brick lovely home in a trendy suburb that is priced at exactly $400,000. Sally Jones had a credit score of 830, which is almost perfect since FICO credit scores only go to 850. The other person, Tom Smith, has a credit score of 680, which is very mediocre, because he can't pay his bills on time and his credit report has too many late payment notations on it. Sally Jones is offered a mortgage at the lowest rate, 3.228%, while Tom Smith is approved for a mortgage of 5.228% -- only 2% more than Sally. Let's do the math and see what Tom's mediocre credit score is going to cost him over the next 30 years.
Sally Jones' monthly payments on her 30 year mortgage at 3.228% will be $1,736.00 = $624,960.00 total
Tom Smith's monthly payments on his 30 year mortgage at 5.228% will be $2,203.37 = $793,213.20 total
Over the 30 year period of home ownership, Sally has had an extra $168,253.20 to invest for her retirement, and her investments have produced an average annual growth rate of about 7%, so Sally has a big fat retirement account while Tom Smith does not, and he also paid $168,000 more for the same house!!! Sally could have easily obtained a 20 year mortgage and paid off her home earlier, saving her another $81,000!!!!
This is a simple illustration showing you how not using credit correctly is costing you a fortune. It doesn't even consider what the huge costs of having lousy credit do to your insurance rates, etc. Every time you pay your credit card bill late, it has the potential of costing you thousands and thousands of dollars in the future!! This drives us accountants crazy because it is such a silly waste of money and so many Americans retire with little or no savings because they are so financially incompetent.
I want to change the way you think about money and materialism and I want to educate you about what your current attitude towards credit is costing you in the long run. The lenders, the bankers, and the capitalists love it that you have made yourself a financial slave to them. They win and you lose unless you learn how to play the credit game. I'm going to show you how to improve your credit rating, get out of debt, and start building wealth.
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