IWTKA...Credit!
What is it?
Credit is system that evaluates and ranks the ability of a borrower to repay their debts.
Credit Scores are derived from an aggregate of the following:
Credit History Length
The Credit History shows how long you have been a borrower. This record is kept even if you’re not actively borrowing any money at the moment. The longer the credit history, the better. A longer credit history indicates that the borrower is more experienced with paying back debt.
Credit Utilization
Oxymoronic as it may be, in order to illustrate your creditworthiness you must use credit. Yes, you must obtain debt in order to prove you should be allowed more debt! This isn’t necessarily a bad thing. There’s no mandate that you must borrow a large sum of money, but you must use some of the credit allotted to you and pay this credit back timely in order to gain a good credit score.
Ideally you want to use no more than 30% of your available credit on credit cards (credit cards are a type of revolving account; revolving account debt will fluctuate every month based on the borrowers useage). If you have a credit card limit of $1,000, you want to use no more than $300.
Payment History
The most obvious and important aspect of credit scoring is your payment history.
It cannot be stressed enough that you need to pay your bills in full and on time! In the event that you cannot pay the amount in full or on the due date, contact the lender and ask for assistance.
Types of Credit
A mortgage and a credit card are different types of credit and they both hold their own weight. Having a mortgage is a positive debt. Diversifying your types of credit accounts can be beneficial to your credit score.
Inquiries
The number of inquiries corresponds to your need to borrow. Having many inquiries can imply that you are overextending yourself, which can deter lenders from allowing you to borrow.
Who does this apply to?
Based on the economy and standard of living in your country, anyone seeking to purchase a home, a car, or start a high-cost startup business will need to borrow money.
It is essential to establish credit early and maintain a good rating so that when occasions arise, an emergency loan or credit card will be viable option.
When Can I begin?
Adults, 18 years old or older, are applicable to start using and building credit.
Once you have applied for some type of credit (credit card, mortgage, etc.) you will begin to accrue a credit history. It normally takes around 6 months for a healthy score to be generated.
After achieving a credit score it is essential that you maintain it!
How do I use it?
For those 18-25, I would recommend starting your credit profile by getting a low-limit credit card and using it once a month for an ordinary bill that you normally pay. Take for instance, a phone bill. Charge that bill to your credit card and pay the credit card the very next day or the same day if possible. Remember, utilization is key.
Avoid charging amounts to the card that you do not have in cash. If you wouldn’t spend $5,000 without the credit card, do not spend it with the credit card. Again, try to keep your utilization below 30%.
Learn your billing cycle! To avoid paying interest and accumulating more debt, pay the complete balance in full before the billing cycle has ended.