Develop good credit karma to help you avoid bad decisions that can come back to haunt you. Bad credit karma can have a lasting effect on a person’s ability to keep a good credit score. Here are some good ways to avoid bad credit karma:
1. Auto Loan Savy If you need a new car, try to finance the purchase over a period of three years instead of five (or six or seven) because your new car starts to depreciate as soon as you drive it off the lot. I’m sure we have all been in the disappointing situation where you really want to trade in your clunker that you may still be paying for only to realize that you owe more on the car than the car is worth. If you are upside down on an auto loan when looking to trade, the only way to cure the remaining balance owed on the car would be to finance the remaining balance in with your new car loan. This means you are paying for two car loans. Not only will your payment be higher but you are only compounding the negative equity problem. In addition, consider what happens if you are in an accident. Insurance will only pay for a portion of the value of your new car if it is totaled. That means you still owe the remaining balance on the loan AND you don’t have a car. In contrast, if you finance for three years you are, in essence, front-loading your auto loan so that the amount of equity you build in the car grows at the same time that you pay down the balance. When you trade the car in, your good credit karma will allow you to use your trade in the way it was intended, to pay LESS on your new car purchase.
2. Save! Save! Save! The reason payday loans and car title loans are so popular is because people have stopped saving. Without an emergency fund, you may have to resort to high interest rate short term loans in order to pay for those unexpected events like tires, dental work and home repairs. Most of these companies prey on people with bad credit that live from paycheck to paycheck. The interest rates on these loans can be as high as 600% (not that is not a typo – it is really happening!). How do you save when you barely have enough to meet your everyday living expenses? Any amount you put back in savings is helpful as long as you only use the savings in an emergency. In fact some credit unions allow you to automatically take a specified amount from your account each month and deposit in a savings account. New debit card benefits allow you to put a portion of every purchase into savings. After a while, you will have a nifty nest egg that will not only increase your credit karma but allow you to pass by those high interest loan companies.
3. Be Smart About Student Loans The next new crisis on the horizon may eclipse the housing crisis. It is the student loan crisis. Colleges and universities are increasing their fees exponentially. In order to pay for an education, the average student has to borrow funds in order to pay for the high tuition. Student loans are easy to get and some student loans will allow you to borrow more money that it actually takes to pay for tuition and books. Students are using this new money to purchase cars, pay rent, and buy electronics. The problem is, the schools are not properly advising these young students that you should only borrow what it takes to actually pay for school costs. Student loans are generally not dischargeable in bankruptcy so this type of overspending early in a student’s life never goes away and has major consequences when that student is trying to start their career, such as preventing you from being able to pay for that new car you wanted to reward yourself with. A general rule is you shouldn’t borrow more in student loans than you will be able to make in one year after getting your degree. Sadly, I have seen people saddled with student loan debt topping $200k just to get a four year degree in education. It doesn’t make financial sense and it is just bad credit karma.