Featured, Finance

Credit is King. What you need to know in this game of chess.

Credit, debit, credit score

[tg_small_content] #Adulting, it’s the term we despise so much. It’s an everyday reminder that now more than ever we wish we’d taken all those naps that we passed up on in Kindergarten, especially now that we have real life responsibilities like paying car insurance and scheduling your own doctor’s appointments. It’s a word that makes us realize we no longer can wake up to already cooked breakfast in the morning or food in the fridge unless we go grocery shopping and cook it ourselves. So damn depressing!

But there comes a time in everyone’s life where we’ll have to (voluntarily or involuntarily) get off the family phone plan and start our own, apply for our first credit card and begin making fiscally responsible decisions for our lives now and in the near & distant times we call the future. Yep, dare I say it, it’s time to act now! As an early/mid or late 20 something, now more than ever you should be forming habits that will continue to build the best financial foundation for you and your family if you haven’t already begun so. [/tg_small_content]

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“Beware of little expenses. A small leak will sink a great ship.” Benjamin Franklin

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[tg_small_content] There’s various financial principles that we should apply to our lives like “Spend less than you earn.” and “Never apply for a credit card when you’re still struggling to pay on another one.” These are all obvious. However, as millennials, we’re the most indebted, financially burdened generation ever. We live in an era of buy now, pay later. Credit can be detrimental to your future financial health so I definitely wanted to take a second to get down to the core of what it is and how it can affect you both good and bad. [/tg_small_content]

So what exactly is credit?

Credit in its most basic definition is just “borrowed money”. It’s your ability to obtain good and services NOW and actually pay for them at a LATER time. It’s the opposite of Debit, which is the money you actually have. (Ex: The money you work for that deposits into your account every 2 weeks, that’s YOUR money.)

There are different types of credit but we’ll focus on the most commonly used credit, which is revolving. This would be any credit card that you own. Revolving credit is when you’re given a certain credit limit, let’s just say $1000 for kicks. The company grants you this limit and you now have access to charge up to that $1000 amount to your card. You have the options to pay it back in full by the due date OR you can carry the balance (revolve to the next month) and just make a payment, such as your $35 minimum payment. Does that make sense? Good.

Now that we’ve understood the most basic form of credit, I’ll slide my way into explaining what’s even more important than the credit card which is your overall credit score. This can be the end all, be all for many people that don’t understand how credit works.

Your credit score is major. Like a stray dog, it follows you everywhere for the rest of your life. It will affect the type of house you can buy, the car you qualify for, your overall buying power at large. If you don’t get the concept of credit down now, you begin to make impulsive spending decisions that can really damage you. These mistakes can cost you thousands of extra dollars over your lifetime! Oh and I almost forgot, potential employers and landlords take your credit score into account as well! It’s nothing to take lightly.

Credit Scores

Your credit score is a number that rates your likelihood of repaying money when a creditor lends to you. The higher the score the less of a risk you are. This number is based off the credit history you’ve built or are building, among other factors.. It’s crucial to be mindful of this number because it follows you and will affect what you can buy with credit in the future. Unless you have $150,000 saved at 29 years old, you won’t be able to buy that house outright. But if you have a average credit score (along with other criteria such as income, etc.) you can qualify for a mortgage loan for that home. See the importance?

[tg_small_content class=”animate”] Now let’s talk a little bit about the make up and what goes into the notorious number that we call your credit score. In determining your FICO credit score (the system most lenders use) 5 things are taken into account:[/tg_small_content]

  1. 35% is Payment Historyhow good you’ve been with repaying past debts on time.
  2. 30% is credit utilizationthe percentage of available credit that is actually borrowed. (Ex. $1,000 credit limit, it’d be better for you to only carry $100 balance versus using/carrying a $950 balance that you have to pay back.)
  3. 15% is length of credit history length of time your credit accounts have been open and have seen activity.
  4. 10% is new creditopening too many accounts at the same time (Makes it seem like you may be in financial hardship.)
  5. 10% is credit mixrepaying a variety of debt such as revolving and installment loans.

[tg_small_content class=”animate”]The factors above, really do play a major role in your borrowing power now and in the future. It’s important to know where you stand.

Credit Building Resources

There are good resources available to you for helping to build and repair credit if you’re in a real slump and need serious guidance to prepare for a big purchase like a home in the near future. I personally can vouch for Dominique Brown, he’s a professional financial consultant that works with people to improve credit for home buying, saving and investing, which leads to financial stability and that’s what we all are aiming for right? I’ve used him as a financial consultant and he was great. He was very hands-on and readily accessible through text message or phone calls for questions. Dominique sent me detailed instructions on what it was I needed to do and the benefit of each step we were taking. My credit has improved through his help. I also learned about consolidating my student loans and the importance of avoiding a default on Sallie Mae from a Periscope he did. It’s never too early to begin creating a solid financial foundation for you and your future. For more information on Dom and his services follow his instagram @YourFinancesSimplified or visit his website for a free consultation here.

Akira J. Dixon is also a great person to reach out to for credit help. She’s a credit coach that teaches principles in credit and how one can leverage it to build wealth. Akira really knows her stuff and can get you on the right credit track. Whether you’re wishing to repair your existing credit or if you’re working on building it, she’s here for you. Go with someone who knows what they’re doing, they’ll get you together! Believe me your future self will thank you for it because being proactive beats being reactive anyday! Follow her on Instagram @AkiraJDixon or visit her website here for more details. [/tg_small_content]

Wrap Up

In summary, credit is a crucial piece of your financial health and you should make sure it’s in good shape. Start by finding out what debts you owe (a financial consultant or coach can help you in this are as well.) Afterwards, begin setting up payment arrangements to pay back those debts.  Don’t open any more credit accounts until you have repaid existing ones. Start building savings for Emergencies, this will put a safety net in place when those surprise situations pop up. This no longer puts you in a tough situation to where you have to borrow money to fix things.

I hope this blog post helped you in the slightest. As 20-somethings, I know that this definitely isn’t the most exciting topic. But look, no one wants to be embarrassed to discuss their credit with their potential spouse or get declined for pre-approval when looking for houses you want. Now is the time to kick it into gear. Let’s start making the right decisions that’ll put you in a position to WIN!

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