Credit Continued
Episode #4 of the course Personal financial literacy: Take control of your future by Riley Burger
Welcome back!
We discussed credit yesterday, but I wanted to add a bit more on the subject with a wealth-building stage-specific guide to credit. Try to identify where in this guide you are with your credit, and I’ll recommend some tangible steps to take!
Wealth-Building Stage-Specific Credit Guide
Stability building:
• I’ve never used credit. How do I build my credit score?
Opening a credit card is the easiest way to start building your credit. Pick a card that works best for you! My first credit card was a Travel Student Rewards card from my primary bank—since I traveled a lot as a student, getting rewards for travel spending went a long way. Make sure you understand the fees, monthly payment process, and fine print.
• I am/was a student, and I have loans! How can I expect to repay them? What does the process look like?
FAFSA has great information on how to manage your loans, whether you are currently a student, or have graduated and started to repay. Visit StudentAid for more info.
Wealth building:
• I’ve used credit, and want my score to be higher. How can I get back on track?
For this, we’ll want to go back to the five main factors that affect your score:
Payment history: Have you missed payments in the past? If so, first, work on making a payment plan for yourself until your balance is paid down. Try to pay off the credit lines carrying the highest interest rates first. Then, moving forward, work on treating your credit cards like a debit card. Try only using your credit card for purchases you could have bought with the money in your checking account.
Credit utilization: Are you spending more than 30% of your credit limit? If you consistently spend more than 30%, consider one of the following. You can spend less, spread your expenses more evenly on each of your lines of credit, or request a credit limit increase. For the last option, speak to a credit card specialist at your bank.
Credit history length: Did you just start out? If all of your credit accounts are fairly new, no need to stress—this factor can’t really be helped. Luckily, all you need to do is keep using the credit accounts you have, and let them grow old with you.
Credit mix: Generally not applicable! Although a diverse number of credit lines can be beneficial for your score, it’s best not to use credit instruments like loans where you don’t have to. Work on getting your other stats up instead!
New credit: Have you recently opened more than one line of credit? You may be hit with this one if, say, within a few months of each other you applied for a mortgage, opened a credit card, and opened a store card. Opening too many credit lines, or having too many lenders look at your credit within a short period of time, is likely to decrease your score. If you can slow down on both things, your score will likely bounce back over time.
• I’m looking ahead to some large purchases (a house, a car, etc.) and want to learn more about how interest rates will affect me.
Investopedia has an incredible lesson on how interest rate changes affect consumers.
Consolidating:
• I’m looking ahead to some large purchases (a retirement home, a boat, etc.) and want to learn more about how interest rates will affect me.
See above.
Tomorrow, we’ll talk about debt!
Until tomorrow,
Riley
Recommended resource
Fun bonus! To test your knowledge on credit cards, use this Wall Street Journal quiz.
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