Are you a recent college graduate? Are you starting your first job? While it’s extremely important to save money when you are first starting out, it’s also quite important to know how to spend money and understand the concepts behind your credit score and establishing good credit.
Many consumers, especially those just joining the workforce, oftentimes don’t understand basic credit score concepts. Here are some tips on understanding credit and ways to establish a good credit score.
As your first paycheck starts rolling in, make sure you are opening multiple lines of credit, including opening credit cards, putting your name on your school apartment lease, and signing your name on the comcast bill. However, when you open these lines of credit and sign your name, make sure you are paying your bills in full each month. If your roommate hasn’t paid your cable bill, make sure to stay on top of them so it doesn’t impact you down the road. However, if you have been impacted by the coronavirus pandemic and can’t pay the full bill, make sure you understand to pay the minimum and reach to your creditor to figure out a reasonable solution or game plan.
Here are five important credit concepts that you should be aware of:
Low credit scores can cost car buyers thousands more
According to the CFA and VantageScore Solutions survey, only 22% of consumers reported knowing that a low credit score borrower, when compared to a high credit score borrower, would likely pay over $5,000 in interest on a $20,000, 60-month car loan. With a low credit score, you are likely to only qualify for subprime auto loans whose annual interest rates often exceed 20%, the study says.
Having a good credit score matters since not only will your interest on credit cards be less than those with worse-off credit, but so will the interest you pay on loans. Having healthy credit can earn you a lower interest rate on new loans and make it easier to qualify for financial milestones in life, like a first apartment or a new car.
Your credit score actually measures your risk of not paying
Only 33% of those surveyed said that they know a credit score measures the borrower’s risk of not repaying a loan, while 14% thought it measures the borrower’s knowledge or attitude toward consumer credit.
You could have a good attitude about credit, but still have a bad credit score. The point is that your score illustrates to lenders how you would use the credit they extend to you. If you’re just beginning your credit journey, know that you need credit to build credit. Once you start using your credit card, lenders and card issuers like to see that you can use credit responsibly, which means using less than 30% of your available credit and paying your monthly bills on time and in full.
Credit repair companies charge for services you can sometimes do yourself
Before you sign up for a credit repair service advertised to you, know what it will cost. While over two-fifths (42%) of consumers surveyed may be right that credit repair companies are usually helpful in correcting any credit report errors or helping to improve one’s credit score, these companies tend to charge relatively high fees to do what you could do on your own for free.
Your age has nothing to do with your credit score, except for how long you’ve been borrowing credit
Nearly half (48%) of the survey respondents reported thinking that age is a factor used to calculate a credit score. The truth is that your age doesn’t matter in calculating your credit score, only your use of credit matters. In fact, the five components that make up your credit score include your payment history, utilization rate, length of credit history, new credit, and credit mix.
Utility companies can check your credit score
Your credit score is a good picture of how likely you are to pay your bills on time, but the survey found that only 50% of consumers know that an electric company can use credit scores to determine the amount of deposit you make.
Unless you have a perfect credit score, there is always room for improvement. The bottom line is that when you are just starting out, it’s easy to overlook the small steps needed in establishing a good score. However, having a good credit score is something that should be maintained and will impact many financial decisions you are able to make in your lifetime. If you have any questions about your credit score, how to obtain credit or how to fix a bad credit score, please contact us for a free 30 minute consultation.