As a young adult, there is one word that should be on your mind that probably isn’t, and that word is credit. I’m sure that you’re aware that in the distant future, your credit scores will be very important in times of applying for loans for your new car and house. But the truth of the matter is that your credit scores can actually affect other areas of your life as well. Some employers are now running credit checks on potential employees. If an interviewee’s credit scores come back as poor or nonexistent, she or he may have just lost their dream job opportunity to another interviewee’s credit scores that came back as excellent. Bummer. Poor credit scores are now even affecting eligibility to open a checking account at certain banks and credit unions. Your credit scores will also affect your eligibility to get your own cell phone plan, insurance rate premiums and deposits costs for utilities. Now that you see how important your credit scores are and how they affect your eligibility in gaining things that you want in life, it is now time to start understanding and building that credit!
What is credit?
Credit is basically borrowed money that you can use to make purchases. Credit comes from a credit grantor who you agree to pay back, plus any finance charges by a certain time.
Types of credit
1. Revolving credit (most credit cards): includes a maximum credit limit where you are allowed to make charges up to that limit. Every month a balance is carried and you make a payment.
2. Charge cards (some credit cards): work very similarly to a revolving credit card except that you must pay the total balance charge every month.
3. Service credit (utility services, cell phone carrier, cable/internet provider, gym membership, etc.): an agreement with service providers that you will pay each month for the services they provide.
4. Installment credit (loans): when a creditor loans you a specific amount of money which you agree to repay with interest over a set period of time.
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Credit score break down
1. 35 percent of your score is based on your payment history. This is huge and why it is so important to pay your bills on time. This portion of your score is affected by the amount of bills that you have paid late or ended up in collections
2. 30 percent of your score is based on outstanding debt. This goes for how much you owe on car and house loans, as well as how many credit cards you have that are maxed out. This is also a huge chunk of your credit. To make sure that you are doing well in this area do not use more than 30 percent of your credit cards limit. Lenders do not want to see someone that is living off of credit.
3. 15 percent of your score comes from the length of time that you’ve had credit. This is another reason to start building credit as soon as possible. The longer you’ve had established credit, the better it is for your credit score.
4. 10 Percent of your score is based on new credit. Opening a new credit card will actually negatively affect your credit score for a short time because it requires a hard inquiry (when you give lenders permission to view your credit), while a soft inquiry is when you view your own credit.
5. 10 percent of your score comes from the types of credit that you already have.
Credit Scores Range:
760-850 Excellent
700-759 Great
660-699 Good
620-659 Average
580-619 Poor
579-300 Very Poor
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How to Get Credit.
1. Credit cards for those with limited credit history- Hopefully by now you have a checking and/or savings account at either a bank or credit union. Most banks and credit unions offer credit cards that are meant for beginners or even students. Try applying for one the next time you take a trip to your bank.
2. Department Credit Cards/Oil Company Credit Cards- Another option is to get a credit card from your favorite department stores such as Victoria Secret, Express or JC Penney. These cards are usually easier to be approved for than a major credit card such as a Visa. Another choice is a credit card from an oil company such as BP or Shell. If you have an oil company credit card you won’t be tempted to splurge on new outfits but instead buy gas; something you will be purchasing anyways. These credit cards usually have a higher interest rate, but a positive credit history will allow you to eventually be approved for major credit cards later on.
3. Secured Credit Card- If option one and two has denied you, you still have the option of applying for a secured credit card. This credit card requires a deposit on the card to receive a credit limit.
Credit Conclusion- Now you are a bit more educated on credit; what credit is, different types of credit, what affects your credit scores, credit ranges, and how to get your first credit card. Once obtaining credit, make sure to do some of your own research on how to use it properly. Many people make big mistakes with credit cards and you do not want to be one of them. Unfortunately, credit is important in our society, and just ignoring it all together will only harm you later down the road. Now go ahead and start building your credit history.
Photo Sources:
http://premierconsolidationloans.com/credit-cards/
http://nationalcreditfederation.com/blog/2010/05/20/do-you-know-the-cred…