My wife once told me a story about Mary, a co-worker of hers that had bought a sofa on one of those “Do Not Pay for 96 Months” plans. The time had come to pay the outstanding balance and the lady’s response was, “I’m not paying for that sofa, it’s all dirty and worn out now.”
This is not the attitude that leads to a good credit rating.
Unfortunately, it appears that the importance of maintaining good credit is something that many people don’t think about. And for these people, the costs are enormous. Check out this comparison: A loan for a $30,000 vehicle financed over 60 months (5 years) at 7% will cost about $5900 in finance charges. That same loan at 21% will cost about $19,600 in finance charges over those 60 months! That’s a difference of $13,700! Makes skipping out on that $189 mobile phone bill look a little foolish doesn’t it? Add a couple more unpaid bills to the pile and the result may be that no one will loan you money at any interest rate.
That negative information on your credit history will follow you around for a long time too – six years in Alberta. This fact is easy for some, especially young people, to forget. Financing a vehicle may seem a long way off to many 20 year olds and it may seem like not paying that credit card bill is the right thing to do at the time. But looking back at the figures above, reality tells a very different story.
Ironically, there is another group that can have trouble getting loan approvals, but for completely different reasons. The person that manages their money so well that they never use credit and pay cash for everything can sometimes be in for a rude shock when the time comes to buy a big ticket item like a vehicle. That’s because without a history of borrowing and repaying, the bank has nothing to gauge the person’s ability to repay the loan. We see this every once in a while where a person has paid cash for everything their whole life and is justifiably proud of the fact. Often, they have reached a point in their life when they want to treat themselves to nice vehicle. Unfortunately, to the bank they are a blank slate and if they aren’t turned down, they often have to pay the higher interest rates usually reserved for those with a poor credit history. It’s not fair but it is the way it is.
Sure, if one can save up and pay cash for a vehicle then none of this matters. But even the most disciplined cash buyer may be hard pressed to save the tens of thousands of dollars required to buy the vehicle they want. For those with the discipline to pay cash for everything, a more effective strategy may be to apply for and use a credit card. Use the card and repay the total balance each month and there will be no interest charges. However, what there will be is a nice record of paying back the money each month which could result in a significant savings one day when borrowing a large sum like an auto loan.
Information about credit reports and credit scores is available from the Financial Consumer Agency of Canada.
