Here we will talk about what credit is, how to build it, and steps to managing debt. Credit is a huge part of how we live our lives and it can get out of hand very quickly.
First lets start out with, what is a credit score?
A credit score is a numerical rating that represents a person's credit files. It lets lenders and other companies know how likely you are to repay debt. If you're looking to buy a home or a car, having debt is a necessity unless you're paying cash in full, all of the time.
Tips for building credit:
Open a line of credit. Open a minimum of 1 credit card to get you started with the process.
Pay all your bills in full and never miss a payment. To pay in full is the “best” outcome. We know it is not always possible to pay in full, the next best is to pay more than the minimum payment every month.
Use the credit card but try to keep the utilization low. An easy way to think about how you want to use your credit card: When you use your credit card, you are then paying an extra towards interest on the card. Ex. You owe $500 on your card throughout the month and your APR is 17.99%. Calculate your monthly rate by dividing it by 12 which is about 1.49%. Then multiple 500 x .0149 which equals out to $7.45 each month in interest. Interest is based on the amount owed so this number will constantly change.
Avoid applying for multiple credit cards at the same time. The most important element in your credit score comes from your credit history. You want it to be smooth and even out the entire time you have an open line of credit. When you open multiple cards at once that will leave a spike in your credit history.
Don't close out your credit card accounts. This goes for the same reason as above.
How is a credit score calculated?
It is hard to know what to focus on when you are trying to build credit. The 5 main elements that go into calculating your credit score are amounts owed, payment history, length of credit history, new credit, and types of credit.
Amounts owed refers to the majority of how you use your card. 30% utilization of your card is ideal. Payment history is one of the more important elements, this will come with time of having the card, and how well you have been using your cards over the years. It is not smart to constantly keep opening new cards. Roughly the perfect number of cards would be 3. That also goes in turn, you should not close out cards either. Opening and closing accounts around the same time will unbalance your history and act negatively on your credit score.
How to check your credit reports:
Firstly, your credit report is a shot of your credit profile. It helps professionals and lenders determine how creditworthy you are. AKA how likely you are to repay them. It is important to check this regularly so you have an idea of what you need to work on and how your score is being impacted.
You can get a free credit report per year. Go to https://www.annualcreditreport.com/index.action
Credit repair agencies:
There are amazing companies out there to help you with your downfall of credit. You're not alone and there are ample amounts of people out there that want to help you get that credit better. It can seem like a far journey but it is possible!
The best steps you can take to repair your credit are:
Keep a close monitor on your score and your report
Pay your bills on time regularly
Get credit counseling (as last resort)
How can I utilize a co-signer?
Who you co-sign with should be a very thought out process. In some cases a co-signer can be needed for you to either get a better interest rate or even get a loan at all. Whoever you decide to ask, you need to make sure you can be in a long term relationship with this person, for the length of the loan.
If you are being asked to co-sign you should be looking at the loan as something you can afford as well. If you cannot take on the extra full cost on your own, do not co-sign. If either person fails to pay the loan it will go on the other person. It can be a stressful situation to deal with. Know the pros and cons of asking for a co-signer before you do.
The reality of Debt:
Debt is defined as the amount of money owed by a person for products or services they purchased on credit (mortgage, cards, car, etc.). Over 75% of American adults are in debt, whether it is good debt or bad debt. Good debt is known as mortgages or student loans, etc. and bad debt is known as credit cards with high interest and brand new cars, etc. Debt can be hard to manage, so it is important to know what it is and to create a budget, whether it is a high or low amount.
