Credit is something that many people are not fully informed about, but critical to understand for future financial success. Learning about credit will help you become more aware of your financial situation, not to mention a better consumer and saver.
What is credit?
Let’s start with the basics. “Credit” is a contract in which a borrower receives funding for an item of value now and agrees to repay the lender at a future date, usually with interest added on to the total cost of the item. This could be for a car loan or mortgage, but it also includes anything you purchase with a credit card or bills you rack up with your doctor or dentist.
The amount of money you will be approved to borrow, and at what rate of interest, depends on how trustworthy lenders view you to be. Your credit trustworthiness is determined and defined by your credit score.
What is a credit score?
A credit score is a report on how well you pay back money that you borrow. The higher your score, the more trustworthy you are in the eyes of lenders. Credit scores can be between 300-850, with a credit score of 700 or above being considered very good. The national average is a score of 687 and in Montana, the average score, according to Experian, is 709.
When you are ready to buy a vehicle, house or big ticket item, banks will run a credit check to determine whether you’re able to take on the debt of the purchase and if you’ll be reliable with your repayments. The score that comes back to them will determine the amount of credit they’re willing to offer you, the interest rate, and how much of a down payment you’ll need.
Good vs. Bad Credit
The best way to build good credit is to be realistic about your financial situation and to strive to live within your means. You should be able to repay the set monthly charge in full on any line of credit, be it a car payment, credit card, apartment lease or mortgage to avoid bad debt. Emergencies or surprise purchases will come up, but you should make it a priority to pay these off each month.
Even things like utilities and rent play a part in your credit score. Lenders pay attention to how well you keep up with bills and other payments so it’s important to keep track of when things are due as missing a bill can easily ding your credit score. Setting up a reminder system for when bills are due can help you to make timely payments and help your credit score rise over time.
Lenders also look at the longevity of your credit score, meaning that they are more comfortable with someone who has a few years of experience paying off debts – so keep at it.
The best way to avoid bad credit is knowing your credit score and how to check it. CreditWise is a great free resource that will check your credit and tell you what bills need to be paid. You should check your score regularly for bills you may not be aware of as late parking tickets and hospital bills can show up on your credit report without notification.
Discuss your credit with a trusted parent or mentor, as they can give you advice based on their experiences.
Save Money with Good Credit
A good credit score doesn’t only impact your approval ability for a loan, it also affects how much you pay for it. Higher credit scores get lower interest rates, meaning your monthly payments will be less as lenders see you as a low-risk borrower.
Your ability to be approved for cheaper cell phone plans, high-ticket electronic items, and even your utilities will improve with a higher credit score is. You also may save on upfront costs as companies are less likely to require a down-payment from higher credit score holders.
In Montana, insurance companies are able to use customers’ credit reports to determine insurance rates, so a better score could help your premium decrease, too.
To see how much money your credit score could save you, try this Loan Savings Calculator from FICO.
Before getting a credit card, it’s important to remember that you should only spend what you can afford. It can be tempting to spend more if you have a large line of credit, but defaulting on payments will cost you more in late fees and ding your credit score.
All credit cards have a credit limit, which is the set amount you’re able to spend based on your credit score. Your card will have a minimum monthly payment, which is the least amount you must pay each month to keep your card active. You should always aim to pay your balance in full each month or else you will have interest charges added to your remaining balance.
If you’ve decided that a credit card would be beneficial in helping you build your credit score or buy a large item that you’re able to pay off, research your options. Consider what you need from the card and get advice from others so you can make a well-informed decision.
Once you decide to get a credit card, you have a few options. You can get a standard credit card (some have rewards and some have annual fees) or a secure card from a bank. If you’re in school, you can get a student credit card or have a parent co-sign a card.
Now is a great time to review your interest rates, minimum payments, and credit score if you already have a credit card or a loan. It’s never too early to take control of your credit, regardless of where you are at in life. Being in control of your finances and having confidence in your management skills is the best way to be financially successful in the future.