Saving for laptop trumps financing 'deals'
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Dear Opening Credits,
I have a score of 441 and 541 currently. I searched for websites who offer financing for laptops for people with bad credit. I found a few, one in particular with APRs from 19 to 44 percent. The laptop I want is $1,269, but after looking at the total cost including 19 percent APR, the cost was $2,577. What is wrong with this picture? -- Adriane
Hmm. Let's start with those FICO scores. You mention two, so you are missing one. There are three major consumer credit reporting agencies in the U.S. -- TransUnion, Equifax and Experian -- and they are separately scored. As you've already seen, the scores can differ greatly. That's because the data that is listed on the reports may vary.
You have a 100 point spread between the two you mention. That's a major difference, and it is a red flag: The one with the 441 score has particularly damaging information on it that the other does not. It could be a fraudulent account with a large balance, or a collection account that you've repaid and hasn't been updated. Another reason might be that information is being sent to just one of the agencies.
Whatever the case, I encourage you to pull all of your credit reports (free once a year from AnnualCreditReport.com), plus the score (try MyFICO.com) for the report you don't have yet. Since you're in the market for a loan, you'll want everything to be accurate. If you need to dispute credit report inaccuracies, now is the time.
What is pretty certain is that your scores -- especially if everything on the credit reports is correct -- are in the awful zone. FICO scores range from 300 to 850. Anything lower than 500 is considered bad. It indicates that you are a serious lending risk. Perhaps you filed for bankruptcy not too long ago, as that would definitely have a negative effect. So would a history of making late payments, not just recently, but frequently and severely. You might have defaulted on bills, from credit cards to utilities to parking tickets, or have been sued for unpaid balances.
As you can imagine, any business in the position of lending money to a person with these types of situations (and the resulting scores) would be dubious about your ability to pay responsibly. Consequently, they would charge excruciatingly high interest rates on loans and credit cards.
A 44 percent APR is crazy. Don't do it. The 19 percent is better, but still expensive. You ask what is wrong with the picture and the answer is nothing -- and everything.
With the "deal" you mention, you'd be paying $1,308 in finance fees. This would be a loan, not a line of credit, so the monthly payment would remain constant. If you were to take it, the payments would be about $72 a month for a three-year loan. By the time you paid the thing off, it would be elderly in the world of personal electronics. The only benefit I can see is that you'd have the laptop (which might be necessary for work) and if you made the payments on time, you'd increase your credit scores. FICO scores rank payment history as the most important factor, and low debt as compared to what you can borrow as the second. In a year, you'd make a decent change to your credit score numbers.
But at what cost? A substantial chunk of your hard-earned money.
If you can, wait and increase your scores so that you don't have to accept such dreadful terms, do. Pay any accounts that are in collection agencies and delete maxed-out credit card balances you may have. Pare down your budget to such an extent where you can satisfy such negative obligations quickly. For help with budgeting and prioritizing, visit a nonprofit credit counseling agency. They do this every day for people like you and it won't cost a thing.
Finally, consider using straight-up cash for the laptop. Sock away $211 each month and it will be in your hands at no extra cost (except sales tax) in just half a year. Make it more feasible by selling something and adding the proceeds to your laptop fund. For motivation, think about what you can do with the $1,000 that you will not pay in interest!
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