Credit mistakes are easy to make especially with so much cool stuff to buy.
Here’s some of the stuff that I have learned about credit, some of it research, some of it complete learning mistakes.
As you might have read in my blog post about being financially frustrated, I started off not knowing anything about finances and below I put into laymen’s terms what I’ve learned.
The word credit is used so routinely in every day conversation but what is it actually?
The first way I heard about “credit” was In college, I took an accounting class and memorized the term “debits on the left, credit is on the right” and at the time I didn’t really understand what it meant.
Then I became a teacher and didn’t have to worry about it.
Or when you give your mom credit when she tells a correct animal fact. Yes, wild kangaroos only live in Australia.
(Yes, I did double check that fact.)
Financial credit is not as easy to get.
According to www.Experian.com, credit is borrowed money that you can use to purchase goods and services when you need them.
What is Credit?
To put it easily, credit is invisible money and you can spend that “invisible” money and pay it back later.
It was originally explained to me like this- credit is what you use to open a tab at a bar… the bar trusts that you will pay at the end of the night.
You use it now, pay it later.
This is unlike cash. Cash is when you pay right away.
Credit= bar tab & Cash= paying right away
What Types Of Credit Are There?
There are four main types of credit.
1. Revolving credit- has a limit and you can make payments (what most of us know as a credit card)
2. Charge cards- looks like a credit card but you must pay off each month
3. Service credit- provides a service; gym memberships, spa membership, phone or electric bills. (Most times, at least for me, if your credit score is decent, electric companies don’t charge a fee to initiate an account)
4. Installment credit- These are essentially loans- like a mortgage, car payment or student loan.
I think this, for the most part is common knowledge- but you probably just never thought of the different names for them. Maybe one day it’ll be a Jeopardy question or the winning question for your trivia game one night. (You’re welcome)
The Scary Part:
Actually checking your credit.
I’ll be completely honest with you. I hardly ever check my credit. The last time I checked it was when I was buying my house 18 months ago- I need to work on checking more regularly, experts recommend at least a few times a year.
While writing this blog, I checked mine. I’ll admit, even though I had a good score last time I checked, I had some sweaty palms while looking- it ended up right where I had anticipated. So a sigh of relief was felt.
The website I used was www.myfico.com however there are others that you can use, and may be a little more user friendly.
Www.mint.com has been highly recommended- it is similar to a personal money management tool. You can link all of your accounts (banking, mortgage, bills, etc) and keep track and manage it all there. It’s like a one stop shop for your finances and best part, it’s FREE.
Now you know about credit
But do you actually need it?
YES and here’s why.
Most people don’t have cash laying around collecting dust to go buy things like a car or a house.
When you go to a car dealership, they don’t expect you to plunk down $25,000 to buy the car, they lend you the money but want to be sure you will eventually pay it back.
That is where credit comes in.
If you have a high score, the lender (the place that gave you the money to buy that shiny convertible from the dealership) is more comfortable giving you the money because they believe you will actually pay it back.
This is also why you get a lower interest rate.
If you have a lower credit score, the lender is taking a bigger risk on you, therefore the higher the interest rate.
This is also where those slogans “No credit, low credit, no problem” comes in. They are right, it’s no problem for them, they will just give you a super duper high interest rate. But if you need a car to go to work, then you have to bite the bullet for the time being.
Same motto goes for a house and even student loans.
So a little tip that I never thought of until Denis told me- if you have student loans, check your interest rate.
If you were like me, at 18, I didn’t know a thing about credit, or really care. Since I had no credit history, they charged me a HUGE interest rate percentage- now that I am older, I can refinance that rate and get a lower interest rate, which means that I am paying more of the debt off instead of just paying off the interest.
How Can I Fix My Credit?
Two easy steps to raise your credit that you can start today.
1. Pay your bills on time. On time does not mean within the grace period. Pay your everyday bills (rent, water & electric bill) by the due date.
2. Pay off your credit card in full every month or keep a low monthly balance.
Sometimes, this can be tricky but there are tons of ways to make extra money.
If you are strapped and need to make some quick cash or you want to start bringing in more money with a steady side hustle, my friend, Michael shows 40 great ways to make money outside of your regular day job.
FAQs
Q: Should I open a credit card for my child?
A: Sure, this will give them a longer credit line history but make sure you pay on time and don’t abuse it. You don’t want to mess up their credit before they even use it.
Q: What should I charge on my credit card?
A: My mom always taught me to live within my means. Which can be hard, especially on a teacher’s salary. I would use my credit card but never charge things that I couldn’t already afford. I would charge things like a tank of gas for my car or my monthly gym membership. This way my card was used and always stayed “active” but never went out of control.
Q: I had an emergency and had to use my credit card. Is this okay?
A: Of course! Life happens and sometimes you are in a less than ideal situation. If you have to charge more than you can actually afford, that’s fine. Just try to pay it off as fast as you can.
Q: What card is best for me?
A: I like cards that offer some kind of reward system. Lots of credit cards offer points on travel or cash back. Shop around and see which best suits you, but pay attention to those interest rates.
Q: How can I pay off multiple credit cards?
A: My advice, start with the biggest amount and highest interest rate. Obviously make minimums on all the cards but pick one at a time that you can focus on paying the most you can afford. Within no time, all those cards will be paid off.
Q: Should I add someone to my credit card account?
A: My gut advice, no. Unless it is your child, everyone should be able to open and handle their own credit card. If you do open a card with someone, make sure you absolutely trust them because if things go south, they can rack up a huge bill and leave you paying it…. And that is not fun.
If you read this whole thing, please comment- I love reading them and I’ll reply or share to help your friends.
If you enjoyed this blog, you will love the credit guide to further help boost your knowledge that we are working on so keep an eye out!
Denis and I with our friends Vanessa and Jose at the Islamorada Beer Company Christmas party.