Why credit is important!

What is credit and Interest? Credit is money that you borrow from a lender and then pay the lender back by a specific date. For example, if you borrow $10 from your mom, you are the b0rrower and your mom is the lender. Something lenders can also do is add interest to the money you borrow. For example, if you borrow $10 from your mom and she adds a 10% interest fee. When you pay her back you now owe her $11. As you can see interest is the cash charge for the privilege of borrowing money. And interest can be a positive or negative interaction. If you are the lender charging interest of course you are on the positive side because you are making a profit and if you’re the borrower, you are on the negative side because you are paying extra.

The benefits of having a high credit score vs. a low credit score!  With a high credit score you have an advantage vs. being with a low credit score. What is a credit score? A credit score is a number that ranges from 300 to 850 and this determines your creditworthiness. Here is how FICO defines credit score ranges: Poor: less than 580, Fair: 580-669, Good: 670-739, Very Good: 740-799, and Exceptional: 800+. 3 benefits of having a high credit score are #1 Receiving better rates on car insurance. #2 Have a larger selection of housing options. #3 It looks better to potential employers. And 3 benefits to having a low credit score are none. When you have a low credit score you are viewed as a high-risk borrower to the lender. Having a low credit score will have its negative consequences. Everyone in the US has credit meaning everyone will have the choice to use it.

What factors into your credit score? A credit score is built on 40% of payment history, 21% of credit history, 20% of credit usage, 11% total balances, 5% of credit checks, and 3% of available credit.

5 useful tips on building credit! #1. Pay your balance off in full by the due date every month, this way you will avoid late payments and higher interest charges. Having late payments will cause your score to decrease. 

#2. Do not max out your credit cards and don’t use your credit card if you do not have the money to pay it back. 

#3. Have a pretty strong foundation about credit usage and know the different terms. Ask God for understanding and wisdom.

#4. Keep your credit utilization below 30% by your statement date. Example if your credit card limit is $300, do not have a balance over $90. (This tip applies to credit cards mainly)

#5. Check your credit report at least once a year to make sure there is no fraud, unrecognized activity going on, and false reports. You can check your credit report 3 times a year but only once from these 3 companies: Equifax, Experian, and TransUnion. There is no fee to this. 

Where to start? To start building credit you can start with a secured credit card and use the credit card for small purchases like gas or groceries, since you will already have the money for those two purchases. Doing this will help ease you in to using a credit card. If you decide to get the secured credit card it will be a great place to start. This card requires a cash security deposit, usually with a minimum of $200. After 6 months of having this card then your bank will look over your statements to see if you are on the right track if so, your bank will most likely decide to switch you over to an unsecured credit card. The new credit card will have better rewards, a higher balance, and you will get your deposit back and they hold your deposit in a savings account so it will earn a tiny bit of positive interest. 

I pray this information is helpful and motivates you to start building credit. Here is a link you can check out to learn more.

Trinity Doctor, Peer Coach, Center for Personal Financial Management

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