It has been ingrained in all of us that we need good credit.
Why does my credit have to be good?
Can’t I just pay in cash?
The saying: “cash is king” comes to mind here. I originally thought that if you pay with cash you will not accumulate any debt. No debt = good, right? After learning from my father that I needed to establish a trade line so that it would show on my credit bureau report, I decided to go on the hunt for my first credit card. At the time I was in college at Southern Illinois University at Carbondale and there were credit card booths galore during orientation. At the time they were all giving out free T-shirts or some other swag so that you would sign up with them. After mulling these booths over, I signed up.
Although I was told I needed to establish a trade line, I was still reluctant to use the card. But in little over a year, when I needed some extra cash I started using it. As my balance grew and grew over the college years, I found myself with a big chunk to pay off post-education. I must have been their best customer due to just making minimum payments on the accounts. Making minimum payments will never pay the debt off. Then I received a letter in the mail that I qualified for an increase in credit limit. At the time I did not know that this would end up being good, once I paid the account down.
It is important to note, this is probably not the best way to go about building up your credit, as I paid and exuberant amount of money in interest on this account. However, if you can get a card and can continue to pay it off each month, you will see your credit score improve. The Obama administration’s Credit Card Accountability, Responsibility, and Disclosure Act of 2009, recently restricted signing up for a credit card until you are 21 years or older, unless you have a guardian or spouse co-sign for you. Young adults won’t be able to make the same mistake I did and rack up a lot of unwanted debt during college.
Moving toward establishing your credit and maintaining it starts with a store card, credit card, student loan, or a car payment to report on your bureaus (Equifax, TransUnion, and Experian). Once your credit gains strength in number you are on your way to becoming more lendable. If you do take on some of these accounts, it is worth keeping your payments current, and keeping the balance around 50% or lower of the credit limit. The best way to approach a credit card payment is to ALWAYS pay it off each month so that you can earn points or cash back on the card and increase your credit score.
Holding down a good credit score will ultimately lead to you to a variety of benefits:
- Obtaining the best interest rate on a mortgage loan – A low rate on a mortgage can save you thousands of dollars in the long run.
- Getting a low rate for a car loan – If you are paying for your car over a 3 to 7 year time span a good interest rate will save you a good amount of money.
- Securing financing for school – Private student loan lenders will look at your credit report to determine if you qualify for a loan. If you are young and have yet to build your credit you may have to have a co-signer.
- Borrowing money – When looking into borrowing money for home improvement, to start a business, ect, having a low interest rate will save you some of your hard earned cash.
- Higher credit limits – A higher credit limit means a better credit score if you maintain a balance that is 50% or below your credit limit.
- Qualifying for a job – Some jobs these days require a credit check, especially financial service jobs. Good credit will help land you a job.
- Low car insurance rates – Saving money monthly with low insurance rates can save you a good deal of money over time.
- Renting an apartment – In the Bay area it is a cat-and-mouse game to get into the place you really want. Having good credit that shows your accountability can help you land that place you’ve had your eye on.
As you can see there are major money saving benefits for maintaining good credit. Your approach to your financial security and knowing when not to take on too much debt can be a major factor for you to have monetary benefit.
Photo courtesy of Anthony Garcia