Wednesday, November 28, 2007

Which is better - Great Credit or Money Savvy?

One way to use free money

This morning, my secretary at work came in (she was off on Monday, and now returning from Thankgiving break) and she was very excited because she just bought a brand new car, and because of her great credit, she was able to get a very low interest rate when buying the car. Now, first of all, let's forget about what my opinion is of investing money in depreciating assets (will be discussed at length later), but lets analyze how good of a deal she got because of her credit, and if she could have gotten a better deal had she listened to me...

She paid $22,000 for a new car (I'm not sure the type, I know it was a Chevy, because she's dead set against buying a foreign made Honda or Toyota, even though they're made in Ohio and Kentucky, respectively.) Because of her great credit (845), they gave her an excellent rate of 3.7%, meaning her payments would be just over $400/month. If her credit wasn't as good, she would have had to have settled for an interest rate of 4.5%, which still seems low to me, but lets analyze what her credit saved her.

At 3.7%, she would pay $814 in interest the first year, and end up paying $2092 in interest over the five year term of the loan. At 4.5%, she would pay $990 in interest the first year, and end up paying $2605 in interest over the term of the loan, so by having almost perfect credit, she saved a very respectible $513 over a five year term, or just over $100 per year, $8.55 per month.

What would money Savvy saw about all this?

Of course, the first comment is to never invest money in a depreciating asset. Secondly, I don't have perfect credit, I have good credit, but I have tons of activity, loans, revolving credit loans, etc (I will discuss how your credit score works at a later time). With my only decent credit, I get offers in the mail all the time for 0% Credit card offers, so I am positive that with perfect credit, you'd have to get more of these. My question to her was - why not get a couple of these cards, and buy the car with the credit cards at 0% interest? At the end of the year term, apply for other credit cards, and continue the 0%. Lets analyze the differences:

With her perfect credit, she saved $513 in interest over the 5 year term over someone that had just good credit. My method - you would save $2605 in interest over the person with good credit, and $2092 in interest over someone with perfect credit!!

Of course, she ended up going with the conventional method. Her reasoning was that she didn't want to use credit cards to buy the car, and she was afraid that it might hurt her perfect credit. It would, a little, but if your only concern is the car you buy every five years, its worth the trade-off.

So my question to any aspiring real estate investors out there is if this method would work for buying a car, would it work for fix-up expenses for houses? Credit Cards are great for short-term borrowing, and if you have no money to get started, this is a great way to get started building your real estate empire (that's how I started.)

Oh, and in another article, I will explain how you can use this credit card trick, and not use any of your own credit to do it.