The Importance of Building and Maintaining a Good Credit Rating

THE IMPORTANCE OF CREDIT

You may be asking yourself, “Why is a credit score important, if I have money?”

It’s a common belief that you don’t need credit if you already have the money to buy everything you want. While that is true, not everyone has thousands of dollars just sitting around.

Do you have goals of owning a home? Purchasing a car? Starting a Business? Saving Money?

If you answered yes to any of those questions, your credit score will play a major role in how much comes out of your pocket. It can even be the determining factor to how you reach those goals. Yes, you may qualify for that mortgage, auto loan, business loan, or any other loan without any credit history or even bad credit history. But what’s the catch?

INTEREST

Interest is the rate you are being periodically charged for the amount of money you are borrowing.

The higher the interest rate, the more money that comes out of your pocket.  And if you’re a millennial like me, you likely have little money in your pocket to begin with haha.


Here’s How It Works

Your credit score ranges from 300-850, and that score ranks your likelihood of paying a loan back in a timely manner.

Putting it simply, if you have a low credit score, you are seen as a risk to the lender to not pay your loans back on time. As a result, you will receive a higher interest rate. In some cases, your applications may even get denied if your score is too low.

Now let’s look at the flip side. What are all the benefits of having a great credit score?

  • Pre-approved for LOW interest rates
  • BEST monthly car payments
  • Being PRIORITIZED when looking for housing
  • SAVING MONEY

So How Can We Start Building a Great Credit Score?

  1. Get a secured credit card
    • It is like a regular credit card, but you have to give the lender money for security in case you don’t make the payments on-time
  2. Obtain an unsecured credit card with a co-signer
  3. Receive approval to be an authorized user on someone else’s credit card

Your Credit Score Is Based on These 5 Things:

  1. Payment History: whether you pay your monthly payment on time
  2. Amounts Owed: the ratio of how much credit you are given vs. how much of it you have used up
  3. Length of Credit: How long you’ve had your lines of credit
  4. Mix of Credit: Revolving vs. Installments
    • Revolving credit: A set amount of money that you can borrow and pay back, and keep re-using (credit cards)
    • Installment Loans: Borrowing a specific amount of money, including interest that you pay back in monthly payments (mortgages, auto loans, etc)
  5. New Credit: How often you open up new lines of credit

So Why Start Now If You Don’t Plan on Buying a House or Car Yet?

u s dollar bills pin down on the ground

Credit is a lot like planting a tree. You have to plant seeds early, water them, and take care of them every day to make sure that it grows.

Trees don’t grow overnight, and neither will your credit score.


Don’t be limited because of a poor credit score. Your future self will thank you if you start now. Use the tips listed below to ensure your best score yet!


Tips


  • Make ALL of your payments on time! Phone bill, utilities, credit cards, auto payment, loans, etc. Delinquencies on your payments will hurt your score!
  • Try keeping your credit utilization down to 30% of your overall balance. If you can pay your bill in full each month, even better.
  • Keep your accounts open for as long as you can. Even if you aren’t using it, having it open will only help. (Unless you have an outrageous monthly fee)
  • Try not to open too many accounts at once if you don’t need them.

 

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