All Things Credit
Everything You Should Know About Credit
What Credit Actually is, How Your Credit Score is Determined, And How to Check Your Credit Report
If healthy credit usage wasn’t modeled to you, I promise you’re not alone. A credit history is crucial in the US for everything from renting an apartment to buying a car. That makes it extra alarming that most of us weren’t taught what credit even is, let alone how to use it effectively. That changes today!
First things first: What is Credit?
To understand credit, think of your group of friends.
When it comes to money, do you have certain friends who are more reliable than others?
There’s the responsible friend, who you know will venmo you back for lunch before you’ve even gotten home.
Then there’s the friend who will take forever to pay you back after you’ve booked a group Airbnb. (And maybe you'll even have to remind them a couple of times.)
And then, there’s the worst offenders — you know that they won’t pay you back for months, if ever.
When you start to think about how financially reliable your friends are, does it change how much you’re willing to cover for them?
Imagine you’re going to a movie with your most reliable friend. Would you be cool to buy the tickets ahead of time, knowing they’d cover the popcorn?
Now what about if you’re going with one of those “never pays you back” friends...would you still be so willing to order tickets in advance? Or would you think twice, and forward them the link to buy their own ticket?
That’s basically you giving your friends a “credit score” - in a nice way, I promise!
Now, banks of course can't know each of us individually. They have to use things like our payment history and how many accounts we have open to figure out our "reliability" (credit) score.
Your Credit Score is Important, but Remember: It Does Not Define You
It’s easy to think of credit scores as the be-all-end-all of financial health. We’ve all got one, so it’s an easy tool of comparison. But honestly, they don’t tell anywhere near the whole story (I’ve met my fair share of multi-millionaires who have credit scores in the 600s, and minimum wage earners in the 800s)
Credit scores are like your BMI in that sense: they produce a lot of confusion, shame, and judgement without actually telling you anything real about your financial picture.
But, having a high credit score can be really useful. Not only will you access lower loan interest rates, but it can help convince people that you're responsible and trustworthy. It can also be a strong negotiation tool, leveraging your “reliability factor” for things like reduced rent rates.
So while I don’t want you to judge yourself for your credit score, I DO want you to work to improve it -- because there are endless benefits to doing so.
What Goes Into Calculating Your Credit Score?
Payment history - have you paid bills on time in the past?
Credit utilization - ideally, you want to be using less than 30% of your available credit (so if your limit is $1,000, keep your balance below $300)
Length of credit history - the average age of your loans and cards. The older the better, which is why you don't want to open too many new cards at once, or close down older credit cards just because you’ve paid your debt off.
Credit inquiries - how many people have pulled your credit report in the last few years (i.e., how many times have you asked for a loan or line of credit)
Mix of credit - you get points for having a larger variety of credit types (credit cards, student loans, mortgage, etc.). Which is so silly because it means your score might go DOWN when you pay off a loan. Don’t leave debt lingering just to “help” your credit score!
Checking Your Credit Score
Before you can work to improve your credit, you’ve got to understand your starting point.
Go to annualcreditreport.com, which is the federal credit report website. There are three credit bureaus (TransUnion, Equifax, and Experian) that are each used by different banks/institutions. By federal law, you can get your credit report for free every year (three times total - once from each bureau) on this website. But during the pandemic, they've been offering it for free weekly... take advantage of that and get really familiar with your credit.
Improving Your Credit Score and Paying Off Debt
Want to work on improving your credit, and paying off debt? Our average client pays off $4K in consumer debt within three months, and increases their credit score by 65 points. Book a free introductory session with Beyond Money today, and let’s dive in!
XO
Kate