A lesson in Credit

One of the best real life lessons you can ever learn is “if you don’t have cash you can’t afford it.”  However, don’t think that this makes credit a bad thing in and of itself.  You just don’t want to be stupid with it and get in over your head.  Think about it this way; if you don’t have cash, then you’ll need to borrow money to make a purchase.  If your credit is SCREWED, you will be forced to pay more, for the same products and services, than those with good credit, due to interest payments.  You’re going to spend the money anyways, so why not take advantage of the benefits?

 

“Before borrowing money from a friend decide which you need most.”

American Proverb

 

The fact is that the only way to establish credit is to start buying with credit.  While it is best to use cash to make purchases, it leaves no record of your payment record or gives a record of your ability to pay.  So, you need to establish credit.

Basically, three companies (credit bureaus) evaluate your credit score

            -Equifax

            -Experian

            -Trans Union

 

In the eyes of these credit reporting bureaus, you are a portfolio/ resume/ account which these companies hold on file. 

Your credit score is your “grade” that determines how risky you are as a prospective borrower.  If you’re too risky, or you don’t have a good “credit resume,” then your interest rates on the money you borrow will increase.  Your credit is your interview.

 

Ways to Build Credit:

- Opening a checking or savings account (parents can open one up for their kids in their name).  Without a checking or savings account, the reporting service has no way of knowing what you have or what your saving record is like.  In fact, without either account you’re are not even a financial entity to the outside world.

-Credit Cards

Parents can open a “mutual credit card” using their child’s name.  This is yet another way to track your payment record and the way you handle your responsibilities.

-Car Loans (Used or new) 

This, of course, is a form of credit and an excellent way to see how well you pay back money and establish a credit record for yourself.

-Line of Credit.

This is what the companies you are dealing with think you are capable of handling, financially, based on your income and paying habits.

- Keeping a job.

It used to be that people worked at one big American company until retirement and they received a gold watch.  That’s great for credit.  But people are more mobile today, changing jobs and moving around the country.  That used to be considered unstable and was undesirable; today, it is not.  So long as you have a record of steady employment, you will be good for obtaining credit.

-Pay your bills on time (i.e.  Electricity bill) 

If you don’t pay bills on time, simply because it’s not a high priority to you, think again.  A record of paying utilities, rent, etc. on time bodes well for getting credit.

-Renting an Apartment

This is another way for a potential creditor to see how you handle your obligations.  This is true whether you’re sloppy with payments or you are scrupulous with your payments.  If you are habitually late, this will be a bad sign for any company considering your creditworthiness.  If you are always on time, you’re well on your way to achieving good credit.

 

Good Debt vs. Bad Debt

Your Home Mortgage vs Credit Card

They are both good because you are using someone else’s money to show the credit companies that you can repay your debt.  But one is a matter of keeping a roof over your head and the other is a matter of satisfying your, uhhh, wants? 

The home mortgage: something tangible that increases in value over time (they are not making any more land), paying down principle towards your home.

“Wants” purchased on a credit card: could set you back years due to the high interest rates if it goes unpaid.  Do not keep a running credit card balance outstanding!

 

“If you don’t have cash, then you can’t afford it…”

Grandpa Pencek

 

“The poor long for riches, the rich long for wisdom, but the wise long for tranquility.”

Milkman         

 

“Live within your means even if you have to borrow money to do so.”

Robin Williams