Purse Ho
Credit is an extremely important factor in your financial health, but many of us are hesitant to review, talk about, or maintain it. Don’t let that be you! Whether you’re new to credit, looking to fix it, or need to discuss credit with your kids, the following tips are for you.
What is credit?
Let’s start from the very beginning: what is credit? According to Experian (one of the country’s three credit bureaus), credit is the ability to borrow money with the understanding that you will pay it back later. Credit can take the form of credit cards, retail credit cards, personal or auto loans, student loans, mortgages, service credit, etc.
Did you know? 79% of Americans have at least one credit card in 2020.
What is a credit score?
A credit score is how you are rated on your “creditworthiness”. This will determine who you can receive credit from, how much money you can borrow, and details like your interest rates. For a more in-depth look at credit scores, see our blog What is a credit score and how can it help me?
Who needs to know about credit?
Everyone Should Know About Credit! Children will benefit from learning the basics of money knowing that credit is not “free” money, as many children seem to believe. Teens should learn about credit before or around the time they start their first job or go to college, as they may need to apply for a vehicle or a student loan. Adults should be familiar with credit because it affects their ability to apply for a mortgage, for example.
Did you know? You can “freeze” your credit to deter scammers, fraud and identity theft by contacting the three credit reporting companies, Equifax, Experian and TransUnion and requesting a “freeze.”
What affects credit?
Several factors can affect your credit both positively and negatively. To name a few that weigh on your score, include:
- Debts such as medical bills, car payments, utility bills, student loans, and mortgages – all of your debts are combined and compared to your income to determine borrowing capacity
- Age of accounts because the longer they are open (the older they are), the more you look like a stable and reliable borrower
- Number of accounts in that too many accounts make you sound like a risky borrower, while only opening the accounts you need makes you a more responsible borrower.
How can I improve a bad credit rating and maintain a good credit rating?
If you’re looking to improve your credit score, know that it takes time, patience, and consistency. If you see “fix credit fast” messages online, it is a scam. When improving your credit, Slow and Steady wins the highest score. Start here:
- Determine your current debts and budget, avoid spending more than you earn
- Avoid opening more lines of credit to pay off your debts
- Pay off high interest balances first
- Keep making every payment on time, every time
If you are looking to maintain a good credit rating, keep the following in mind:
- Pay more than the minimum amount due, it is better to pay the entire balance
- Check it often for errors or fraudulent activity
- Keep credit usage low by avoiding credit limits
- Avoid closing old accounts – they help your credit age
How do I explain credit to my children and adolescents?
What children and teens learn about money as children will affect them into adulthood. Start early by teaching young children the basics of money (check out our KidsPlus program.) And that despite what it may sound like, credit cards are not free money!
When speaking with teens about credit and credit cards, it is essential that they know the following:
- Manage your own money
- How to create a budget
- Balance a current account
- Understand how interest works
Teens and young children need to be diligent and responsible not only with their money, but also with the potential dangers of entering their personal information online. When discussing credit with your kids, it is also necessary to discuss scams, fraudulent activity, and the possibility of identity theft.
With “Get Smart About Your Credit Day” approaching this year on Thursday, October 21, we hope you take the time to brush up on credit management and develop a plan to support your credit health.
Sources: MoneyUnder30, Consumer Finance, The Balance, Experian,
https://www.moneyunder30.com/credit-repair
https://www.consumerfinance.gov/ask-cfpb/how-do-i-get-and-keep-a-good-credit-score-en-318/
https://www.thebalance.com/teach-your-child-about-credit-cards-960193
https://www.experian.com/blogs/ask-experian/credit-education/faqs/what-is-credit/