How To Save More With a Good Credit Score

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[The following is a partial transcript of this episode of The Scott Alan Turner Show. Listen to the full episode to hear this story, listener questions, money hacks, and inspiring stories of people that are changing their financial lives. Subscribe to the free podcast on iTunes or Google Play]

On the show last week I gave a red alert warning about car dealers charging insane amounts of interest on used cars – 18%! These dealers were selling junkers for no money down, no credit check, no employment check. It sounded like a person didn’t even need a pulse to get into one of these high interest rate loans.

Even the monster mega bank Well Where Did My Money Go is allowing people to borrow at almost 25% for an car loan!

25%!

We’ve gotta get people educated on credit scores!

85% of new cars are financed. Which I understand. I don’t like it, but I get it. Saving money is hard, it takes time, and we aren’t born understanding loans, credit scores, and the true cost of interest over time, any more than were born knowing how to hold a fork.

We’re still working on that with our twins. Scoop the peas! Don’t eat them one at a time, right?

If you choose to borrow, if you have a choice, choose to borrow wisely, and choose to save money too.

People with credit scores of 760 or higher get the best interest rates on car loans and mortgages, which can save tens and even hundreds of thousands of dollars over your lifetime. You’re going to have a mortgage, so it’s critical to get the best mortgage rates.

According to Value Penguin, a credit score of 720 or higher will get someone a 4% interest rate on a new car. At the bottom end someone with a 500 credit score will pay 15%.

What’s that in real dollars? Knowing the real dollars causes real behavior change. Especially if you like keeping more of what you worked so hard for.

If you’re like me you got your first car by seeing how much is the monthly payment, and can I afford that? Mine was $261 a month. The insurance was $240 a month.

$261 plus $240 equals money moron. See, you’re not alone.

What a bad credit score costs

Here’s two examples.

First one person with great credit and one person with terrible credit. They both get a $30,000 car loan, paid off in 5 years.

The person with bad credit will pay $9,000 MORE in interest.

What extending the loan term costs

This is sick, but lenders are allowing people to borrow for 84 months.

The cost of interest between a 36 month and 84 month loan is $2,500 in wasted money. And that’s with the best credit score.

An ok credit score will cost $7,000 more in interest and wasted money for an 84 month loan.

Have you ever thought about why loans are in months and not years?

For one, we can’t do math. 84 months – how long is that? I double checked with my fancy calculator. It’s 7 years.

Imagine if a salesperson told you about a 7 year car loan. Seven years! That’s a long time. 84 months, I have no idea how long that is, so people focus on the monthly payments, not the length or the cost.

Here’s some additional warnings

What happens far to often is a person gets underwater on a loan – they owe more on the loan, than what the thing is they borrowed money for, is worth.

If a person borrows $30,000 for a new car, drives off the lot, the car is now used and worth $25,000. They can’t sell the car unless they come up with the $5,000 difference, because they owe $30,000. They are underwater. That’s an oops moment. Oops!

You avoid that by:

  • putting a big down payment
  • having a good credit score for lower interest
  • having a short term loan of 36 months

The short term loan means more of each payment goes towards principal instead of interest. It helps avoid being underwater, or catching your breath that much faster so you don’t drown in debt.

Recognize people are sometimes in a place where they get behind on payments, are paying off debts, had to let medical bills or accounts go to collections. All that’s available are higher interest loans. Fix your eyes on paying off those loans as quickly as possible so you can keep more of your money. Don’t let the lenders win. Don’t let the banks win. You win. You will win with money.

Can you remember ever being asked ‘did you get a good deal?’ Or ‘was it expensive?’ When you commit to driving the junker for a while, then moving up to the junker+, then the just ok car, each step paying cash or keeping the loan as small as you’ve decided.

Once you get to the point where you can write a check in full for that great car, you’ll look back and congratulate yourself on the actions you took. And you’ll be able to answer, ‘yes, I got a good deal because I negotiated and paid cash’. Nanny nanny boo boo.

Woah, woah, look at Mr/Miss money pants over there. Do you know how many people make the small, short term sacrifices for huge, long term wealth by saving up and paying for a car in cash? Not many. You can show off to the show offs if you choose to. The difference is most show offs don’t have anything to show for it. All flash, no cash.

  • If your starting point is just paying the minimums on your debts and getting through until the next paycheck, you do that and focus on getting to the next step.
  • If your starting point is paying more than the minimums on your debts, you do that and focus on getting to the next step
  • If your driving that piece of something that’s got rust on the bumper and the McDonald’s french fry that’s been under the passenger seat for the past three years, you drive that and focus on getting to the next vehicle

Most people have a million dollars in their driveway or garage. I did, and many other listeners did or do too. The savings on interest, or buying wisely, not having a car payment or mortgage for the rest of your life, the compound effect of those monthly savings will add up to a million dollars if you let it.

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