After paying off my credit card debts and switching to the way real WEALTHY people pay, CASH, the credit reporting/scoring agency decided to lower my score. Why?  Well they think someone carrying 0% is not as good as someone who has been actively using the credit card.  I have a credit limit around 15K, and zero balance (now forever), yet creditkarma rates me at a “C” score or 658 to 559 for Credit Utilization which is rated VERY IMPORTANT for the score, see figure below.

Okay, why are they trying so hard to motivate me to use a credit card?  I mean, why not rate higher bills paid on time, my income, debt to assets, or maybe congratulate me on having a zero balance with 800.

Maybe they are incentivizing using a credit card so MUCH, because they directly financed by credit companies.  If we pay with cash, we spend a lot less, see tons of research on behavioral responses comparing spending with a credit card verse CASH.  It has been noted that people using credit cards spend 12 to 18% more than they would using CASH.  Plus, when we use a credit card we tend to fall into the pay it later!   I am sure the credit card companies (the banks) love this, because their interest rates are at 16-32 percent on the money they loaned.  What do we get if loan money to the bank?  Bankrate.com reports I can earn 0.44% today.  Um.. Credit Card or my own cash?  What do you think?

I am on my track to wealth, and these credit cards and credit scores are not going to derail me.

Links:

www.bankrate.com

www.creditkarma.com

google scholar search

When I graduated university (2006) I was driving a paid for 2001 Sebring, which ran great!  However, my co-workers (also recently graduated) went out and got amazing rides – Porsche Boxters, Nissan 350z, Acuras, Corvettes, and even a Lotus Elise.  They got the financing from the dealership or the local credit union.  A few of them made fun of me for not having the super sports car.  Then the Sebring as stolen and totaled - so I got a check from the insurance company.

The insurance gave me the kbb value for the car, and off I went.   I fell into the car trap - needing a car to find my identity.   I went down to the local credit union and took out a loan for a Mazda Rx-8, luckily it was used.

However, I had just signed up for a $323 payment every month for the next six years – ouch!   After watching my paychecks get zapped by a mortgage, car loan, and insurance payments - I decided enough is enough. Now the RX-8 is gone, and I am driving a used mini-van. I have my reasons for driving a van over a car at this time.  First, I got an amazing deal.  It is paid for with cheap insurance.  Also, the van is great for hauling drywall and lumber for a home remodel.  Furthermore, I think my fiancée secretly loves it, since she says the seats are so comfortable.

On to the story:

 After graduating university in 1992, Mr. Eric Engineer landed a great job.  In his first year after graduating he was making $78,000 a year.  This was very exciting to Eric and his family.  Eric had a goal since he entered university, to own a BMW.  Eric told his family once he started working that he planned to save money from each pay check for a new BMW.

After saving and working hard with many hours of overtime, Eric had been able to save $65,000 in two years!  That Christmas in 1994, he announced to his family that he would take saved money and get a nice new BMW.  After New Year’s Eric and his father went to the various auto-dealers in the area hunting for the ideal BMW.  Eric test drove a super BMW (740i), priced at around $ 65,000.  Eric said to his father “this is it.”  The dealer suggested that Eric should take the car home and show the family.  Eric felt like a real success driving in that car home. “Look at me now”, he could now say to those who doubted him in the past.  He smiled at the thought of getting rid of the rust bucket he drove in school.  He was now riding in style.  At home that night, Eric’s father was very happy for son’s achievement.   However, his father was bit concerned with Eric’s future financial plan. 

Eric’s dad was a financial planner, so he suggested to his son that they should sit down and look at other alternatives.  Eric had never taken a course in finance, and was clueless to the power of compound interest.  That night, after running some estimates based on the S & P 500 performance with his father, Eric was convinced now to purchase a used car and invest the rest into a mutual fund.  Eric was a bit embarrassed to return that BMW to the dealer the next day, but he knew his financial security was at stake.  That month Eric was able to get a good used BMW that still looked nice for around $6000, and was able to invest the remaining money into an index fund that mirrored the performance of the S & P 500.  How did this choice pan out for Eric?  See below for the results of this $60,000 decision.

As we can see, the BWM consistently lost value (15% a year) – no surprise here.   While the average return for performance of the S&P 500 was about 10.6% between 1995 and 2010.  Eric’s decision of how to spend the $60,000 resulted in a choice between $3000 verse $624,000 in 2010.  Eric was very happy with his decision to drive a nice used car.  

Sources:

·         Motortrend http://www.motortrend.com/roadtests/112_9503_1995_bmw_740i_road_test/viewall.html

·         MoneyChimp  http://www.moneychimp.com/features/market_cagr.htm

·         Kelly’s Blue Book http://Kbb.com