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Category: Credit

This category includes everything you need to know about credit including what it is, how it can help you, and more!

  • The Value of Building Credit at 18

    Turning 18 marks the beginning of financial independence, and one of the most important steps you can take is building credit. This foundational step often goes unnoticed by many young adults, but getting started early offers long-term advantages that shape your future financial opportunities. Let’s explore why building credit at 18 is not only smart but essential.

    Why Building Credit Matters at 18

    At 18, you gain the ability to start building credit, and this early start gives you time to craft a strong financial profile. A positive credit history opens doors to loans, housing, and other essential financial products that rely on a good credit record. The earlier you begin, the easier it becomes to handle larger financial commitments in the future.

    The Key Benefits of Building Credit Early

    1. Establishing a Solid Credit History
    Your credit history is a reflection of how well you manage borrowed money. By starting at 18, you can begin building credit from the ground up, laying a strong foundation for future financial success. This will be useful when applying for loans, credit cards, or even renting your first apartment.

    2. Improving Your Credit Score
    Your credit score is a key metric that affects everything from loan approvals to the interest rates you’re offered. When you begin building credit early and maintain good habits, like paying bills on time and keeping balances low, you’ll see gradual improvements in your credit score. A high score opens the door to better financial opportunities, like lower rates and higher credit limits.

    3. Expanding Financial Opportunities
    Building credit gives you more options when you need financial products, from securing loans to qualifying for credit cards with rewards. It also impacts other areas of life, such as renting an apartment or even applying for certain jobs, where a solid credit history can work in your favor. By starting early, you’re setting yourself up for success when those moments arise.

    Learning Financial Responsibility

    As you work on building credit, you also gain essential financial skills that will serve you throughout your life. Managing credit involves more than just borrowing money; it encompasses a range of financial habits that are crucial for long-term stability and success. By starting this journey at 18, you have the opportunity to develop key skills such as budgeting, timely bill payments, and monitoring your spending.

    Creating a budget is fundamental to financial health, as it helps you track your income and expenses, ensuring you live within your means. Learning to pay bills on time not only contributes to a positive credit history but also instills a sense of responsibility and accountability. You’ll begin to understand the importance of cash flow management and how to prioritize essential expenses over discretionary spending.

    Moreover, the habit of regularly monitoring your credit and spending helps you identify patterns and make informed financial decisions. This proactive approach can alert you to potential issues before they become significant problems, empowering you to take corrective action when necessary. Developing these habits early on makes it easier to navigate future financial challenges, whether that means managing student loans, saving for a car, or planning for retirement. Ultimately, by learning financial responsibility through building credit, you equip yourself with the knowledge and skills needed to achieve your financial goals and secure a stable future.

    employee shaking on a job; employee will build their credit at 18
    Photo by fauxels on Pexels.com

    Protecting Yourself with a Strong Credit Profile

    In addition to unlocking opportunities, building credit early provides a vital financial safety net. A strong credit score and a positive credit history empower you to navigate life’s uncertainties with greater ease. For instance, if you encounter unexpected expenses—such as medical bills or car repairs—having established credit can make it easier to secure a loan or access a credit card with favorable terms. This financial cushion helps you avoid falling into a cycle of debt when emergencies arise.

    Moreover, a solid credit profile becomes especially valuable during transitional periods, such as switching jobs or moving to a new location. Employers and landlords often review credit histories as part of their evaluation processes, and a good credit score can enhance your chances of securing a desirable job or rental property. Having a strong credit history demonstrates reliability and responsibility, which are attractive qualities to both potential employers and landlords. Additionally, during economic shifts, having a robust credit history can offer more favorable interest rates on loans, allowing you to maintain financial stability even in challenging times. Ultimately, building credit serves as a protective barrier, enabling you to face life’s uncertainties with confidence and resilience.

    Long-Term Gains from Building Credit Early

    Starting your credit journey at 18 offers benefits that extend well beyond immediate advantages; it lays the groundwork for enduring financial success. A solid credit history, established early, opens doors to better financial products and services, making significant life milestones more attainable. For example, when it’s time to purchase your first home, having a robust credit profile can make the difference in securing a favorable mortgage with lower interest rates and better terms, significantly impacting your financial landscape.

    Additionally, landlords frequently check credit scores as part of their rental application process. A strong credit profile can enhance your chances of securing a rental apartment, as it demonstrates financial reliability to potential landlords. Moreover, building credit early cultivates financial discipline and literacy, empowering you to make informed decisions about future investments and savings. With a well-managed credit profile, you’ll not only enjoy easier access to loans and credit cards but also have the confidence to pursue your financial goals—be it starting a business, funding education, or planning for retirement. In this way, early credit building sets a positive trajectory for your entire financial future, providing both stability and peace of mind.

    Navigating the Pathways to Credit Initiation

    Fortunately, a plethora of avenues exists for young adults to embark on their credit journey, allowing them to establish a solid financial foundation early on:

    • Secured Credit Cards: These cards require a cash deposit as collateral, making them accessible to individuals with limited or no credit history. Secured credit cards are an excellent starting point, as they allow you to demonstrate responsible credit management. By making small purchases and paying off the balance in full each month, you can build a positive credit history and transition to an unsecured credit card in the future.
    • Authorized User Status: By becoming an authorized user on a parent or guardian’s credit card, you can leverage their established credit history to kickstart your own. This arrangement allows you to benefit from their positive credit activity without being solely responsible for payments. It’s a great way to learn about credit management while building your credit profile.
    • Student Credit Cards: Many financial institutions offer credit cards specifically designed for students, featuring lower credit limits and tailored benefits to suit their unique needs. These cards typically come with educational resources that help young adults understand credit and manage their accounts responsibly. They are an ideal option for students looking to gain experience in handling credit while still in school.
    • Credit-Builder Loans: Structured to help individuals build credit from scratch or rehabilitate a tarnished credit history, these loans involve making small monthly payments that are reported to credit bureaus. The funds are usually held in a savings account until the loan is paid off, at which point you receive the money. This approach encourages consistent repayment habits and helps establish a positive credit history.

    Paving the Way for Future Generations

    When you start building credit at 18, you’re not just securing your own financial future—you’re setting an example for future generations. Your experience and habits can influence younger siblings, peers, or even your future family members, showing them the value of responsible credit management. By demonstrating the importance of building credit early, you empower those around you to take control of their financial futures as well. This proactive approach helps create a legacy of financial literacy and independence that extends beyond your own life.

    Embracing the Journey Towards Financial Freedom

    Beginning the process of building credit at 18 is not just about handling finances—it’s about securing your future. By starting early, you lay a foundation that opens doors to better financial opportunities, from loans to housing, while also preparing you to face unexpected challenges with confidence. Each step you take, from paying bills on time to managing your credit wisely, sets you on the path toward long-term financial freedom.

    Embracing this journey means you’re taking control of your financial future, shaping it in a way that aligns with your goals. Building credit isn’t just about numbers; it’s about creating a life where you can make empowered choices, pursue your dreams, and enjoy the security that comes with financial stability. Your commitment today will pave the way for a lifetime of opportunities.

  • What’s On Your Credit Report: Everything You Need To Know

    What’s On Your Credit Report: Everything You Need To Know

    Your credit report is a crucial tool that lenders, banks, and credit card companies use to evaluate your financial history and determine your creditworthiness. So, what information is on a credit report? It contains a wealth of information about your financial habits, including your credit accounts, payment history, and outstanding debts. In this blog post, we will discuss the information that is typically included in a person’s credit report.

    Personal Information

    • Name
    • Date of Birth
    • Social Security Number
    • Current and Previous Addresses
    • Employment History

    Your personal information is very important because it helps credit bureaus accurately identify and track your credit history. It is important to review this information regularly to make sure that it is up to date and correct. Any errors in your personal information can lead to problems down the road, such as difficulty getting approved for credit or loans. In addition to the basic personal information, some credit reports may also include additional data, such as your phone number or email address. However, it is important to note that your credit report does not include sensitive information such as your religion, ethnicity, medical history, criminal record, or political affiliation. This is because the Fair Credit Reporting Act (FCRA) prohibits credit bureaus from including this type of information in credit reports.

    Credit Accounts

    • Credit Card Accounts
    • Loans
    • Mortgages
    • Retail Accounts
    what information is on a credit report: mortgages
    Photo by Tierra Mallorca on Unsplash

    The credit accounts section of your credit report is one of the most important sections, as it provides a detailed history of your credit activity. This section can also help potential lenders determine whether you are a responsible borrower who pays bills on time. In addition to the payment history, this section will also show whether the account is current or delinquent. If an account is delinquent, the credit report will show how many payments were missed and how many days past due the account is.

    The credit accounts section of your credit report can also provide insight into your credit utilization rate, which is the amount of credit you are currently using compared to your total available credit limit. A high credit utilization rate can negatively impact your credit score, because it suggests that you may be relying too heavily on credit and may have difficulty paying your bills on time.

    It is important to note that not all credit accounts are reported to credit bureaus. Some creditors may not report to all three major credit bureaus, or they may not report at all. This can result in incomplete or inconsistent information on your credit report. It is also important to review this section of your credit report regularly to ensure that all the information is accurate and up-to-date. If you find any errors or inaccuracies, you should contact the creditor and credit bureau immediately to have the information corrected.

    Public Accounts

    • Bankruptcies
    • Tax Liens
    • Judgments

    The public records section of your credit report can have a significant impact on your creditworthiness. Consequently, if you have a bankruptcy or tax lien on your credit report, it can be difficult to obtain new credit or loans, and may result in higher interest rates or fees. Credit reports do not automatically include all public records. Credit bureaus may obtain this information from public records databases, but they may not have access to all public records information.

    what information is on a credit report: Petition to File For Bankruptcy
    Photo by Melinda Gimpel on Unsplash

    If you have a bankruptcy or tax lien on your credit report, it is important to take steps to repair your credit. This may involve working with a credit counselor or financial counselor to develop a plan to pay off your debts and improve your credit score. You may also want to consider obtaining a secured credit card or other type of credit account to help rebuild your credit.

    It is important to note that some public records, such as civil suits or arrests, are not included in your credit report. The Fair Credit Reporting Act (FCRA) prohibits credit bureaus from including certain types of information in credit reports, including civil suits or arrests, unless the information is related to a financial transaction.

    Inquiries

    • Hard Inquiries
    • Soft Inquiries

    The inquiry section of your credit report reveals the frequency and recency of credit applications, with hard inquiries impacting your credit score for up to 12 months, while remaining visible for two years. Multiple hard inquiries can decrease your credit score by a few points each, with a greater impact when clustered together.

    Conversely, soft inquiries, including personal credit checks and pre-approved credit offers, have no impact on your credit score and are not visible to lenders. Furthermore, credit scoring models consider multiple inquiries within a short timeframe for a specific loan or credit product as a single inquiry, acknowledging consumers’ tendency to rate-shop.

    To minimize hard inquiries, only apply for credit when needed, and avoid multiple applications within a short period. Using credit monitoring services can also help keep track of your credit report and alert you to changes or new inquiries.

    Credit Score

    • FICO Score
    • VantageScore
    what information is on a credit report: credit scores
    Photo by engin akyurt on Unsplash

    Your credit score is an important factor that lenders and creditors use to determine your creditworthiness. Due to this, a good credit score can help you qualify for better interest rates, higher credit limits, and more favorable terms on loans and credit accounts. Your credit score is calculated based on the information in your credit report, which includes your payment history, credit utilization, length of credit history, types of credit accounts, and recent credit inquiries.

    FICO scores are the most widely used credit scoring model and are used by most lenders and creditors. FICO scores range from 300 to 850, with a score of 670 or higher generally considered to be a good credit score. VantageScores are another type of credit score that is becoming increasingly popular. The VantageScore range is from 300 to 850, and a score of 661 or higher is generally considered to be a good credit score. While FICO scores and VantageScores are calculated using a similar algorithm, they may take into account different factors and weight them differently.

    Credit Scores Can Vary

    It is important to note that your credit score can vary depending on which credit reporting agency is used to calculate it. Each credit reporting agency may have slightly different information on your credit report, which can impact your credit score. However, regardless of the credit reporting agency, it is important to maintain a good credit score by making payments on time, keeping your credit utilization low, and avoiding unnecessary credit applications. Additionally, regularly checking your credit report and using credit monitoring services can help you stay on top of your credit and quickly address any issues that may arise.

    Credit scores are not a one-time calculation and can change over time, depending on your credit behavior. For this reason, regularly reviewing your credit report and credit score can help you identify areas for improvement and take steps to build and maintain good credit.

    In addition to working with a credit counselor or financial advisor, you may also want to consider using credit monitoring services or credit score simulators to help you stay on top of your credit. These tools can provide you with alerts and insights about your credit report and score, as well as tips and recommendations for improving your creditworthiness.

    Places You Can Check Your Credit Report

    1. AnnualCreditReport.com – This website allows you to request a free credit report from each of the three major credit reporting agencies (Equifax, Experian, and TransUnion) once per year.
    2. Credit Karma – This website offers free credit monitoring and access to your credit report and credit score.

    In Conclusion

    Additionally, your credit report is a crucial tool that lenders and creditors use to evaluate your creditworthiness. It contains a wealth of information about your financial habits, including your credit accounts, payment history, and outstanding debts. By understanding the information that is included in your credit report, you can take steps to improve your credit score and increase your chances of being approved for credit. Be sure to check your credit report regularly and dispute any errors that you find.

    Resources

  • Three Reasons Why Building Credit is Important

    Credit plays a vital role in our lives and is critical to securing many of the things we desire and need. In this modern world, having good credit is incredibly important. It affects our ability to borrow money, secure a loan, and even get a job. Here are three reasons why you should start building your credit as soon as possible.

    Better Loan and Credit Card Rates

    Lenders often reward good credit scores with lower interest rates. Lower rates make it easier for you to borrow money for a home, car, or even a personal loan. When you have a high credit score, lenders consider you a low-risk borrower. Lenders can offer lower interest rates on loans and mortgages to low risk borrowers because they have proven the ability to pay back borrowed money. The higher your credit score, the better the interest rate you will receive. This can translate into significant savings over the life of the loan. However, you may have trouble getting approved for a loan if you have poor credit. If you do get approved for a loan, the interest rate will likely be high. High interest rates can make it difficult to repay a loan.

    For example, a person with a credit score of 720 or higher is likely to receive a mortgage interest rate that is 0.25% lower compared to someone with a credit score of 680. Over the life of a loan, this can save you thousands of dollars.

    Additionally, credit card companies also use your credit score to determine your interest rate. If you have good credit, you will likely receive a lower interest rate. That means you will pay less in interest charges and be able to pay off your debt faster.

    Photo by Pixabay: https://www.pexels.com/photo/person-holding-debit-card-50987/

    Access to Better Employment Opportunities

    Employers are increasingly looking at credit scores when making hiring decisions. This is especially true for jobs that involve handling money or making financial decisions. Good credit is a sign of responsibility and reliability. Many employers believe that individuals with good credit are less likely to engage in financial misdeeds or embezzlement.

    Having good credit can help open the door to better job opportunities. In today’s competitive job market, it’s essential to have a strong credit score to stand out from other applicants and increase your chances of landing your dream job.

    one of the Three Reasons Why Building Credit is Important, is that you have Access to Better Employment Opportunities

    Peace of Mind

    Finally, having good credit can give you peace of mind. With good credit, you will have the financial stability to handle unexpected expenses or emergencies. This sense of financial security allows you to make big purchases, such as a home or car, without worry. Additionally, good credit can also help you in times of financial hardship, such as a job loss, medical emergency, or other unexpected expenses. With good credit, you have more options to access credit. That can include personal loans, credit cards, and lines of credit, to help you get through tough times. You also won’t have to worry about being unable to get a loan or being rejected for a job because of poor credit. You will be able to focus on your goals and live your life with confidence, knowing that your good credit score will help you reach your financial goals.

    In Conclusion

    Building and maintaining good credit is essential in today’s world. It can help you secure better loan and credit card rates, open doors to better job opportunities, and give you peace of mind. It’s never too early or too late to start building your credit. Start by getting a copy of your credit report, paying your bills on time, and keeping your credit card balances low. With a little bit of effort, you can have a strong credit score and enjoy the many benefits that come with it.

    Struggling to stick to your financial goals? My Financial Goals Workbook can help—learn more here.

  • How Are Credit Scores Calculated? Learn Here

    How Are Credit Scores Calculated? Learn Here

    There are different ways that credit scores are calculated. Unfortunately, there is no agreed-upon method that all firms, credit unions, banks, etc., use to calculate credit. FICO and VantageScore are the most used models for credit scoring, but there are a few other scoring models. There are also a variety of scores made for specific purposes, such as purchasing a home or car. Learn ways to build credit in our article, 4 Ways to Build Credit Quickly.

    FICO: One Way Credit Scores Are Calculated

    The FICO score was created in 1989 to create a credit scoring model to make lending easier and unbiased. Classic FICO scores are calculated using payment history, credit utilization, credit history, types of credit, and new credit. This website goes more in-depth on FICO scores.

    Requires More Attention

    Payment history is 35% of the calculation. As long as you make payments on time and do not have any lawsuits, liens, bankruptcies, or foreclosures, you will score well in this part of the calculation. If your payments are late, it will affect your credit to the extent that it was late.

    Credit utilization is 30% of your score. You should use a maximum of 30% of your credit limit, but it is best if you can keep utilization down to 10%. Using a maximum of 30% of your credit limit means that if you have a $1,000 limit, you should only spend $300.

    Requires Less Attention

    Credit history is 15% of your score. To make sure you score well in this category, you only need to make sure you make payments on time. This part of the score is something that you can only perfect over time.

    Credit use is 10% of your score. This category is about the different types of credit you have. This can be credit cards, mortgages, auto loans, etc. This category is a little tricky because it wants you to have various types of credit, but you can’t apply for credit too fast, or it will be a red flag on your report. You can improve this category over time.

    Last is new credit, which is 10% of your score. In this category, applying for a lot of new credit at one time will harm your score. It is best to apply for credit slowly. For example: You could get a secured credit card when you turn 18, and as you build credit, you should have the option to either change that card from secured to regular. Then maybe a couple years down the road, your credit might be enough to get a car loan. This adds to the variety of credit lines in your name and will increase your score (after the initial drop from the hard inquiry).

    VantageScore: Another Way Credit Scores Are Calculated

    The VantageScore was created in 2006 by the three credit bureaus (Experian, Equifax, and Transunion) to compete with the FICO credit score. This score uses payment history, age and type of credit, credit utilization, total balances, recent behavior, and available credit to calculate a score. These categories are weighted differently than in the FICO scoring model. NerdWallet goes more in depth on this scoring model here.

    More Important to Focus On

    Payment history has a high weight at 40%. With this category, you need to make payments on time. Any late payments will stay on your report for seven years, meaning they will continue to affect your credit for seven years. Fortunately, those late payments drop off your credit report after 7 years, which should raise your credit score.

    The second category is age and type of credit. This category has medium-high weight at 21%. For this category, let’s say you have a good mix of credit with a 15-year-old mortgage, a 3-year-old car loan, and credit cards of varying ages, and you pay everything on time. You will do well in this credit category if you maintain a variety of different types of credit over a longer period of time.

    Credit utilization also has a medium-high weight of 20% – similar to the last category. To calculate credit utilization, you divide your balances by your available credit. A rule of thumb for this category is to keep your utilization under 30%, but keeping it under 10% is even better. Having high utilization (more than 30%) will have a negative impact on your credit score.

    Still Important, But They Have Less Impact

    Total balances are the next category. It has a medium weight of 11%. This category counts your total debt, including current and delinquent accounts. For this category, lowering your total debt will increase your score.

    Another category is “recent behavior”, which has a low weight of 5%. This category is about your new accounts and the number of hard inquiries you have. Keeping this number low will be better for your score. That means not opening new accounts very often – maybe once a year. Twice if absolutely necessary.

    Lastly is available credit, which has an extremely low weight at 3%. This category is about the amount of credit you have available to use. Having more credit available to use can be good, as long as it fits with your reported income. Having too much available credit can impact your score negatively. The idea here is that having too much available credit makes a person riskier in the eyes of a lender. This person could attempt to use all of their credit and not be able to pay it back because they had too much available to them. This part of the scoring model has a low weight and cannot affect your credit score as much as the parts of this calculation.

    A teacher explaining how credit scores are calculated

    Other Credit Scoring Models

    There are other, less common credit scoring models. These include TransRisk, Experian’s National Equivalency Score, Credit Xpert Credit Score, CE Credit Score, and the Insurance Score. Then there are industry-specific credit scores. An example of this would be if you were looking for another credit card, the company would do a calculation based on your history with your other credit cards, and they may give you that credit card if you have a good history with credit cards.

  • 4 Ways to Build Credit Quickly

    4 Ways to Build Credit Quickly

    This article will teach you how to build credit and improve your credit score. The 4 ways to build your score are to pay off debt, increase your credit line, spend within your means, and avoid bad credit loans. You can learn the basics of credit here.

    close up photo of credit cards
    Photo by Pixabay on Pexels.com

    Pay Off Debt to Build Credit

    If you’re looking to build credit quickly, there’s no better place to start than by paying off debt. By paying down your debts, you’ll improve your credit score, which will help you qualify for lower interest rates on new loans. I recommend the snowball method for paying off debt. This means that you’ll pay the minimum on your debts with higher amounts, and put as much as you can on your lowest debt until you pay it off. When that one is paid off, you’ll move to the next one.

    The snowball method works because it forces you to focus on what you owe first. You won’t be able to ignore your debts if you’re constantly reminded of them. Plus, once you’ve paid off one debt, you’ll feel more motivated to keep going. Once you’ve paid off your first debt, you’ll think “I can get the rest paid off, too!” And then you’ll want to get rid of the rest of your debts.

    Another good debt payoff method is the avalanche method. This works by putting any extra money you have toward your highest interest debt, then to the next highest interest debt, and so on until you’ve paid off your debt. This method helps you avoid paying as much interest as you possibly could.

    You can always choose one method and switch it up when you decide something else will work better for you. Whichever method you choose, you will be on the path to building your credit!

    One free website I like that helps people make a plan to pay off debt is https://extension.usu.edu/powerpay/. You can plug in all your debts – the amounts, interest rates, terms, etc., and it will make a chart of the various ways you can pay off your debt so that you can compare and decide which option is best for you.

    Increase Your Credit Line

    One way to build credit is to increase your credit line. As long as you keep your spending at about 10% to 20% of your total credit availability, this will help you build credit. Be careful of lifestyle creep though. More credit = more responsibility.

    The best way to increase your credit line is to pay off any outstanding debt. If you have a balance on your current credit cards, call your creditors and ask them if there are any payment plans available. You might be able to lower your monthly payments or extend the length of time you pay each month.

    Another option for building your credit and increasing your credit line is to consolidate your existing balances into one new loan. If you have multiple loans from different lenders, consolidating them into one new loan could save you hundreds of dollars per year. You will likely have a lower interest rate on the debt consolidation loan than you had on your credit cards, which is one thing that will help lower the amount of interest you pay over the life of the debt. Another good thing about getting a debt consolidation loan is that your payment amount each month will be stable and predictable. You just have to be careful not to add to your credit card debt again.

    You can also consider applying for a secured credit card. This type of card requires you to put down some cash upfront but will allow you to earn rewards points, and like with an unsecured credit card, you can incur interest charges if you do not pay it off every month. WalletHub has a list of secured credit cards and compares them here.

    a plant growing in coins building credit

    Spend Within Your Means

    It’s easy to fall into the trap of buying things you can’t afford. This is especially true when you’re trying to build up your credit score. However, if you do end up with too much debt, you might find yourself unable to pay back what you owe. In addition, having too much debt can make it harder to get approved for future loans.

    If you want to avoid falling into this trap, try using a budget instead of relying solely on credit cards. A budget helps you set aside money each month for specific expenses, such as rent, groceries, utilities, and other bills. By sticking to your budget, you’ll be able to see exactly where your money goes and whether you’re spending too much.

    For example, you could create a checking account specifically used to pay off your credit card, and you could fund that account with your spending limit. Make sure to pay close attention to he amounts you are spending. You could check your balance weekly and pay it off when you check it, or you could set it to auto-pay the balance a couple of days before the due date. Either way, paying attention to your balance means you are much less likely to overspend and fall into the debt trap.

    Avoid Bad Credit Loans

    If you need to borrow money, there are several options available to you. You can apply for an unsecured loan through a bank or other financial institution. Or, you can apply for a secured loan, where you pledge something as collateral against the loan. A third option is to use a bad credit loan. This type of loan is not ideal and should only be used as a very last resort. These loans are designed to prey on people who have had trouble getting traditional financing because of low credit scores. These loans can have significantly high interest rates and can hurt your chances of paying off your debt.

    The best way to avoid bad credit loans is to get a personal loan from a reputable lender. When applying for a personal loan, be sure to shop around for the lowest interest rate possible. Also, keep in mind that if you default on your payments, your credit will take a heavy hit, and it will be harder for you to get credit from lenders in the future.

    If you are in a place where you are looking into bad credit loans, you are likely better off saving to get a secured credit card to build credit.

  • What is Credit? Learn Here

    If you are new to the world of credit, your first question is probably, “What is credit”? Credit is a contract between a buyer and seller stating that the buyer will have the ability to borrow money or access products or services with the promise that they will pay back the money or services at an agreed-upon time. Essentially, it allows you to get what you need now, knowing that you will pay it back later. You can also Learn 4 Ways to Build Credit Quickly here.

    person holding credit card credit is improving
    Photo by Anna Shvets on Pexels.com

    Types of Credit

    The three types of credit are Revolving, Installment, and Open. Revolving credit lets you borrow up to a certain amount repeatedly. Examples of revolving credit are credit cards and home equity lines of credit.

    With installment credit, you borrow money one time and pay it back over an agreed amount of time with interest. Auto loans, mortgages, and personal loans are all types of installment credit.

    Open credit is a line of credit that you pay after you use it. Utility bills and phone bills are examples of open credit. This kind of credit does not have interest, but you may be fined and/or have your service removed for not paying the bill by an agreed time.

    What is Interest?

    Interest is a percentage of the total amount of the loan or usage of a credit card charged to the borrower. With credit, the lower the interest rate, the better for your wallet. Lower interest rates are better because you pay less for borrowing money. Higher interest rates mean you pay more money for borrowing money.

    How Do Interest Rates Work?

    Interest rates on loans are usually lower than on credit cards, but the amount you borrow and the amount of time you take to pay it off are usually higher than on credit cards. There are several different types of loans, including auto, mortgage, personal, student, home equity, credit-builder, and payday loans.

    The interest rate you get with a loan depends on the type of loan and your credit score. For example, payday loan rates are typically very high (~400%), while the federal student loan interest rate is about 4%. One one hand, having collateral for a loan will make it easier to borrow and may lower your interest rate because it makes lending less risky for the lender. But on the other hand, using collateral to get a loan is risky because the lender will be able to take your collateral if you cannot repay the loan. This article from britannica.com goes more in-depth on this topic. 

    What If You Have Bad Credit?

    If you have no credit or bad credit, it may be difficult to get a credit card or a loan. The lender may think you will misuse the credit you receive, or they may think it is too risky to find out how you will use it.

    Having no credit is better than having bad credit because you have a chance to start well. Having a cosigner or collateral can help you get a loan if you have no credit or bad credit. If you use a cosigner, your cosigner will have to make payments on your loan if you do not make payments. A co-signer should be someone you trust and are completely honest with about your financial situation. You should only ask someone to co-sign for you if you know you can pay back the debt without damaging their credit.

    person writing on white paper signing loan what is credit
    Photo by Cytonn Photography on Unsplash

    How Do Credit Cards Work?

    With credit cards, you pay interest on the amount of money left on the card on each month’s due date. So if you always pay back the entire balance on the card on or before the due date, you will not have to pay interest. Interest rates on credit cards are typically higher than on loans because the risk to the lender is higher. The rate you get can depend on the type of credit card you get and your credit score.

    Getting a secured credit card can help you build enough credit so that you can open an unsecured credit card. You borrow against the money you give the lender with a secured credit card. You will need to save up some money, typically $300 to $500 minimum. The specific amount will depend on your lender.