Personal Finance- Credit and Loans

We previously examined the case of accumulation and investment of savings. However, most of us- even those who are fortunate enough to secure well-paying jobs- would find it inconvenient to delaying purchasing cars, a house, or have our kids delay college until amassing enough savings to pay the entire cost outright. This is the purpose of credit and loans; it allows people with a solid income and history of responsible financial conduct to borrow large amounts of money from banks to purchase high-ticket items, and subsequently repay the bank the amount owed plus interest. Interest rates are typically 5% or higher for home loans. Credit cards are essentially loans, in which the borrower (credit card holder) controls the balance owed by paying off the credit card in part or in whole every month. This degree of control comes with a price; typical credit card interest charges are 18% of the unpaid credit card balance, and penalties are levied every month in which the minimum payment is not made. One's ability to qualify for loans, especially home and car loans, is largely determined by one's credit score, a numerical score as calculated by the 3 major credit bureaus, whose value is based on a person's financial/credit history. A person with many cases of defaults, late payments, etc. will have a low credit rating, with harsher penalties for severe and/or repeated defaults. A person with a clear or nearly clear credit history will tend to have a high credit score, and thus be most likely to be approved when applying for a loan. A normal credit score is in the 600-700 range; anything above 700 is considered "good", with anything below 600 considered "poor." A person with a poor credit score is considered a risky investment for a bank or other lender; thus, such a person who does find a means for securing a loan can expect to have high interest payments. This is a natural consequence of the direct correlation between risk and return; in a similar sense as when you might invest in a risky stock, a person with a poor credit score is considered a high-risk investment for a bank, and thus should entitle a bank to demand a high return rate in consequence of approving such a risky individual for a loan. If you should find yourself with a low credit score owing to a history of default, please beware of companies offering to "repair" your credit score for a price in order to help you qualify for a loan. Such an arrangement is a waste of your money, which is more effectively spent in paying off your debts directly. Any errors on your report can be corrected by you directly contacting the credit bureaus and sending documentation to correct such erroneous data. Credit scores based on accurate data cannot be "repaired" except through paying off your creditors and proving financial responsibility (no additional defaults) over time.