What is credit & why is it important?
The awful dreaded word, CREDIT. The highlight of adulting. You guys, to be completely transparent with you, I never even knew credit existed until I decided I wanted to move out on my own. But doesn’t this happen to a lot of us? I mean high school did not come with a manual of how to survive adulthood. But anyways, what is credit and why is it that we need it to buy all the nice things in life?
Think of it like this…
Companies that advertise this “zero down payment” with the small font of (credit approval only) they are only interested in loaning/selling to you if your credit is good/excellent. If your credit score is nowhere near good, then you would have to put a down payment and most likely have a higher interest rate. Here’s a quick rundown. A low score could be under 570 while a perfect score is 850.
Building credit is important if you want that apartment, a new house, and a new vehicle. To sum up adulthood for you, you won’t get far without credit. So might as well start learning what steps to take now so that you won’t be filing bankruptcy at age 25. I am here to help you prevent that.
Let’s start out with the two different types of cards out there and scenarios to better understand each one.
Unsecured VS Secured Credit Card
Unsecured: Basically this is a card that you are using from the company you are using. It does not involve any down payments to receive the card. It was approved and given to you with a credit limit.
While a secured card uses YOUR money and whenever you are done paying whatever you use and you’re ready to cut off or they upgrade you to an unsecured credit card, you get YOUR money back.
Secured Card scenario
You go to the bank and ask for a $500 limit on a credit card. Say you don’t have much credit to start with or you’re starting from poor credit (trying to work towards excellent). A bank isn’t going to just give you a $500. They want to see if you’re trustworthy enough and that you can make payments on time, so in return, they ask YOU to provide a secured amount of a credit limit you are looking for. The bank will ask for a $500 deposit. The bank “KEEPS” that $500 and gives YOU a $500 limit.
Once you consistently make your payments ON TIME and you had paid back $500, the bank gives you BACK that $500 you had deposited awhile back ago. The best part is that not only do you create a better relationship with the bank and raising your credit, but after it is paid back and they return the $500 – they upgrade you to an “unsecured credit card”. So bottom line, you don’t lose any money.
A similar scenario goes for a secured deposit for an apartment/home you are renting. If there is no damage to your home/apartment and you have gained an excellent rapport with your property manager then once you move out of your home, you will get your secured deposit back. Again, no money loss.
So without further ado, now that we have a better understanding of the type of credit cards and scenarios out in the real world, here are 7 steps to building credit.
- Get something in your name. Preferably through your bank. Banks have excellent choices that can either give you cash back after you spend a certain amount of money or even fun rewards you could earn. Call your bank to get options!
- Make your payments ON TIME!! As long as your payments are made by the due date, you’re in the clear! Anything after your due date will cause a negative impact on your credit score. It can also create a HIGHER APR rate. You don’t want that!! Don’t be late…Just don’t.
- Set your bills on auto-pay! It’s much easier having the payments set up on auto pay than trying to remember the date. I love the feeling of when I get paid the money is already being taken out. My bills are being paid and I don’t have to worry about it. Keep in mind though that it’s not worth doing autopay if you don’t exactly have a set payday. The risk of overdraft goes up and if you don’t have money in your account when they attempt to take the money out, they charge you a fee! The fee ranges between ($10-$45) depending on the company. Just be mindful of making sure funds are in your account.
- Stalk your credit score. Make sure to stay on top of checking each of your credit reports annually for errors and discrepancies. This is so important to make sure you’re PAYING ATTENTION to your credit. I use Credit Karma and my navy federal bank offers to show our FICO score and Credit Score.
- Keep your credit utilization use LOW. Don’t think that if you get approved for a credit card limit of $1000 that you can max that out and don’t receive any repercussions on that. Trust me, it drops your credit score! Personally, I would NOT exceed over 10-20%. People would say 30% but honestly, staying way under 10-20% is how you cheat the system. I would use that 10-20% on small things such as gas, groceries, and to treat yourself from time to time. Then, I would pay it back at my next payday. After doing this for 6 months, the bank will offer you an additional loan amount and credit bearers can raise your credit score to 30+ points. Trust me, It has happened to me before and it’s a phenomenal feeling to be one step closer to excellent score!
- Avoid opening too many NEW accounts at once. New accounts lower your average account age, which honestly makes up a huge chunk of your credit score. You become at risk to more credit lenders. If you are thinking about buying a home, you might want to think twice if you have too many accounts.
- Bad Credit or No credit? Get added as an authorize user // If you are looking to increase your credit score in the matter of months (NOT YEARS) this is the smarter route to take if you know someone willing to lend a helping hand. They don’t have to necessarily give you the credit card but it is an option to increase your score fast, IF THEY are in great standing with their credit card that they are authorizing you to be a user for. For an example, I was added to my husband credit card that he was under 1% usage on and it was his OLDEST credit card he has open. Once he added me, my credit score jumped 40+ points because it takes in the factor of the credit utilization, how old the account is, and the good standing he had with the account.
I advise you to still talk to someone at your bank to decide which card fits well with what you want and if its specifically for raising credit or getting rewards. There’s a lot out there to choose from and the bank has great representatives that could help you find what you’re looking for.
Whew! That was a lot of information, but I am happy to help you all achieve the best life in your twenties! I hope I was able to answer the basics of building credit and knowing the two types of credit cards out there. Don’t feel overwhelmed. We will make mistakes in life. We are human. But if we all want the finer things in life we have to work on ourselves first. Even if you have poor credit it is VERY possible to clean up your mistakes. Don’t feel discouraged. You can do this!
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