Credit: What You Need to Know
Credit can add to your life or take away from your life. Let this article help breakdown the ins and outs of what credit is all about.
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Credit: Breaking it Down to the Definition
Breaking down credit to its simplest definition would be this: credit is borrowing money from the bank, and then paying it back at a later time. It’s that simple - in theory - but there is a lot to it that people don’t understand.
The biggest pitfall for people is when you don’t pay back the credit on time. What happens then is an interest fee is tacked on to your total, making your overall payment more than the actual price of the item you bought. I think it is common sense that if you are going to borrow money, you are going to need to pay it back in a timely manner. Well, banks feel the same way. You need to pay them back in a timely manner.
Your credit report is where you can look through a detailed and itemized list of all the things you have used credit to purchase. As you guessed it, this report then dictates what your credit score is each and every day. If you are really following along, then you just put the pieces together right there, and that is the first step. You might be thinking to yourself, “man, I don’t think I have ever really thought about my credit score. I have no idea what my credit score is.” Well, folks, that is about to change today.
Next Step: Secure the Card
How you obtain a credit card will depend on where you are starting your credit journey. If you are starting this process as a young person (18-20), you can have a family member help set up a credit account and become an authorized user with you. This means that you will both have access to using the card, but maybe your “authorized user,” which let’s be honest, is probably your mom or dad, can be the ones making payments. Many people do this, and it is a great strategy. This way you are using credit, building your score, and setting yourself up for success in life before you might be ready to actually manage a credit card all on your own.
If you are starting from scratch, you can get a secured credit card, which I won’t go into too much detail about Basically, this isn’t your end-all-be-all card but is instead supposed to be used to help build your qualifications to apply for better an unsecured card later on down the line.
I am not here to advise you to choose one path or the other, so consult a family member or even head over to your local bank and have them break it down for you.
Let’s dive into the things you really need to know about credit, the perks, and downsides.
Pitfalls/Benefits
As we break down this list, I will be explaining the positives and negatives of each point. The formula is very simple. If you avoid some of the most common mistakes, you will have better credit. I will be giving my tips and tricks as well about how to avoid these pitfalls. Please be mindful, this is not official financial advice. Consult a banking and credit expert before making any decisions.
Applying for Too Many Credit Cards
We are all enticed to get credit cards from our favorite stores because it usually means more discounts. While that does save you money in the short term, is it going to save you money in the long term? Is it really a good idea to have more credit cards than you do pairs of sunglasses? Most experts would say no. I have read many articles discussing the fact that most successful people only between one and three credit cards, total. I only have one and I can tell you from experience that if you manage just one really well, your credit score will be high!
People often fall victim to the misconception that taking on more credit cards is a good thing. That would be correct if you are always on top of your payments. Let’s be honest though people, that is going to be hard to manage. So, keep it simple and don’t go overboard with racking up too many credit cards.
Missing a Payment/Not Paying it Off in Full
This is a two-for-one because the consequence is the same. Missing a credit card payment and/or not paying a charge in full can be a big downfall because of the potential interest you will have to pay for not paying the correct amount on time.
The fee percentage can be anywhere from 5% to 25% interest if not paid in time. That is why it is imperative to have your finances organized in a way that you pay off your credit card on time each month.
A way that I make sure I do that is by having reminders set in my phone, plus through my bank they have alerts you can set up that will send you an email/text of when your next payment is due or coming up. Even if you are sitting there right now reading this and thinking to yourself, “yeah no I don’t need that, I can remember on my own.” I would highly recommend thinking twice about setting a quick little reminder in your phone. You will thank me later.
What’s the benefit of paying on time? RAISING THAT CREDIT SCORE, BABY! Not only are you avoiding interest fees, but this is how you raise credit. Come on, that is why you are reading this newsletter in the first place, to learn how to boost that credit score!
Thinking You Have Free Money Each Month
You might be thinking, “well yeah it is free money,” but that is what a majority of people think when they use credit. They don’t feel how real it is because you do not need to pay it off right in that moment. Your bank account doesn’t actually deplete when you charge your credit card, so it is easy to feel like it’s not real. This leads to the dreaded, overspending.
Everyone has a budget, planned out or not, we all have a specific supply of money we can spend every month. A credit card can give people a feeling that their budget is now increased. This is the mindset you want to avoid.
Don’t stray from your budget and just think of your credit card as another way of buying something in the moment, but that does eventually need to come out of your bank account.
What I like to do when I use my credit card, I pay off the credit immediately. That is so whatever account my credit card is attached to; the money will then get withdrawn so I can visually see money leaving my bank account. I know I lost some of you there, but trust me, this is the best way to do it and it should be super easy based on how your accounts are set up.
Avoid overspending and you won’t run into any trouble!
Look Over Your Credit Report
A credit card can be a very easy thing to use on any and every kind of purchase. This, however, can make your credit report very long and sometimes shocking when it comes time to pay off the card. It is important to look over your report to get a feel for what you are spending your money on.
Also, this is a great way to check if there are purchases you didn’t make (fraudulent behavior). Yeah, that stuff is real. Check your credit card regularly to keep an eye on the purchases that are being made with it and make sure you recognize all of them. Banks and financial institutions have great fraud protection, so if you find any fraudulent activity, it would be smart to take advantage of those perks to protect your account.
Set Up Monthly Expenses
Credit cards can be great when used towards things you pay for on a monthly basis. Subscriptions, rent, groceries, etc. Those are all great things that you can plan out and use credit towards. They are also usually on the more expensive side so they can help show that you can handle credit.
Also, this is a good side bar. When using credit, it is beneficial to show you can handle more credit with bigger purchases or charges. This will help build up your credit limit, another helpful tip!
Big Purchases
Great credit reports lead to great credit scores. Great credit scores lead to the ability to buy big things. Houses and cars are great examples of things you can buy with a great credit score. Having a good credit score will show the bank and the sellers that you can handle a loan and secure a mortgage.
It is all on a spectrum as well, so even if you do not have amazing credit, you will still qualify for something. A better credit score, however, will lead to a better loan you can secure for big purchases. So, shoot for the stars and start working on your credit now for these future purchases.
A Great Outlook
Like most of you, I am still learning about credit right alongside you. That’s what it’s all about. These are the types of topics that inspired me to start this newsletter in the first place. To start the conversation. Topics that seem difficult are just overlooked, and I was tired of seeing that happen. Credit is the perfect example of that.
I was never taught about credit in school, and it is so important to our everyday lives. So, what I say with this article is to take it as an introduction, and to then go out and start your journey of understanding how credit and credit cards are going to be a part of your life.
Start a budget, stick to it, use your credit wisely, and raise that score.
With that, I leave everyone with the challenge to tackle finances head on and take control of them, instead of them controlling you.
Cheers!
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