It’s never too soon to think about establishing credit, but it’s important to know what credit is, how credit is used, and how it can impact not only your financial well-being but also your career.
According to dictionary.com, the definition of credit is, “confidence in a purchaser’s ability and intention to pay, displayed by entrusting the buyer with goods or services without immediate payment.”
So, this thing known as “credit” is super important to your financial well-being on lots of levels. Here are some basics to get you started on the path to good credit habits.
You first become eligible to apply for loans and credit cards on your 18th birthday. From that point forward, you can begin establishing credit, maintaining a strong score, and developing a positive history of credit use. It’s important to note that everyone begins with good credit – it’s a completely level playing field. The goal of establishing credit is to build a history that supports a positive score, and you only need to rebuild credit if you’ve damaged the score. So starting off on the right foot can really give you a long-term advantage.
Your credit score
Your credit score is used to indicate your ability to borrow money and manage your borrowing responsibly. That means lenders will use your credit score to make informed decisions about how likely you are to follow up on your commitment to pay back a loan. If they see that you have a history of responsible borrowing habits, they are more likely to give you a loan – and the interest rate that they charge you on that loan is also determined, in part, on your credit score.
Good grades vs. good credit
Let’s look at it another way. It’s similar to the grades you earn in school – your overall grade in a class indicates your history of homework and tests, which allows teachers or colleges to develop an idea of your academic performance. Students with a grade of D or F probably turn in homework late or miss assignments, and they also may not study for tests. Students with an A or B grade are more likely to have good study habits, meet due dates, and be generally responsible students. Grades may not give the full story about a person, but they can give someone a reasonable idea of your history as a student which can help predict their future performance.
The same is true of credit card companies, and other institutions that loan money to individuals – a good credit score lets them know you have a history of paying back the money you borrow, and makes you more likely to be approved for loans, and receive lower interest rates. Just like grades are the result of many factors (homework and test scores, turning in assignments on time, and participation), credit is the same – in order to have a good credit score, you need to build a history of good borrowing behaviors, and some of the most important habits are:
- Paying your bills on time
- Not borrowing more than you can afford to pay
- Effectively managing multiple lines of credit
Your credit is comprised of various lines of credit, which can include credit cards, student loans, auto loans, mortgages, business loans, and many others. All of these variables are calculated together, and the final number is your credit score!
Although credit may seem intimidating, with the proper resources and information, anyone can set goals and improve their score. In our next installment of this article series, we’ll dive deeper into the practices of establishing or repairing credit, so anyone can take their next steps in achieving a bright financial future.
Financially speaking series:
Part 1: Why is credit so important? | Part 2: How do you establish credit? | Part 3: How do you repair credit? | Part 4: How do you monitor credit? | Part 5: What is interest? | Part 6: How does credit affect you?