You've heard you’re supposed to start working on your credit-- so maybe you applied for one and it's sitting on your dresser or maybe you don't know where to start. Or maybe, like many of us, you're paralyzed by the idea entirely? But… what even is credit?! Here, with help from Experian- we will attempt to explain what credit is exactly and how to set yourself up for success.
What is Credit?
Credit is the ability to borrow money or access goods or services with the understanding that you'll pay later. ... To the extent that creditors consider you worthy of their trust, you are said to be creditworthy, or to have "good credit." ~Experian
Why Bother Having a Credit Card at All:
Applying for loans: Your credit history and scores are vital when you're applying for loans for houses, cars, businesses, etc... If you have good credit, it will likely be easier and in some cases, quite easy, to get approved. You may be offered better terms, such as a lower interest rate or an extended loan.
Renting an apartment: Landlords often check your credit before agreeing to offer you a lease. If you have poor or no credit, you might need to pay a larger security deposit to rent the apartment, turn on utilities, and set up internet or cable services.
Getting your own phone plan: You may need good credit if you want to think about leaving your family’s plan and getting a new cell phone.
Obtaining insurance: Having good credit can lower your monthly premiums, and in some states, can impact your insurance rates.
Credit Cards Do’s (and Don’ts):
Do pay off your card in full every single month: It’s important to get in the habit now of paying your bill in full monthly to avoid interest charges, and to keep your credit utilization ratio low. Your utilization ratio, or rate, is the amount of credit you're using compared with how much you have available Experts recommend keeping your utilization ratio under 30%. So if you have a card with a credit limit of $1,000, always keep your balance under $300.
Don’t spend more than you can pay: If you take one thing from this post, it’s this one. Access to a credit card can often incentivize spending more than you have. If you don’t pay off your bill in full every single month, you will start to accrue interest. If left unchecked, this accrued interest can lead to debt that you can’t get out from under. It's best to treat your credit card as a debit card and only use it for purchases that you already know you can afford to pay off in full this month.
Do check for identity fraud: Some small payments may go unnoticed, and can lead to someone actually using your identity to fraudulently open accounts. If someone is using your credit card numbers, you'll want to act quickly to file a dispute to resolve the matter.
Don’t submit back-to-back loan applications (or credit card applications): Multiple applications for a loan can be a red flag to creditors, who may see your many applications as a sign of financial distress. This translates into risk, which most lenders try to avoid.
Experts say the best age to start your credit is 18, so apply for and activate your card, make a few small purchases to start to establish your credit, and start making those monthly on time payments now (in full always!), this will help lead to better financial independence and options in the future.