WHAT IS CREDIT FOR?
That is a great question. Unfortunately, I didn’t ask myself this very important question until later on in life, specifically just 2 years ago, I’m now 35 (old I know, my 6yr old tells me all the time). That was when I decided to finally find out what my credit score was (i was hoping to buy a house haha). Sadly it wasn’t good, but now I am on a mission. My mission is to find out as much as I can about credit what its uses are and ways to improve it. I hope I can also help you understand how to make your credit score/report healthy and keep it that way.
WHAT IS CREDIT
Credit is a consumer ability to get money in order to purchase items or pay for services when they are in need of, with a promise, based on trust, to pay at a later date. Sometimes the request for money can include a waiting or “approval period”. This approval period could be due to the consumer’s credit rating. A credit grantor has the final say in the approval process. Sometimes dictating the final loan amount as well as the accrued interest rate (depending upon the consumer’s credit score/history).
TYPES OF CREDIT
From what I have learned recently there are four different types of credit (*one of which I had never heard of until now)
- Revolving credit. Revolving credit is when you are given a maximum credit limit, which you can charge up to that limit. Each month you can carry over the balance owing as long as you are able to make the minimum payment required to keep your account in good standing and avoid any penalties. Most *credit cards are some form of revolving credit.
- *Charge cards. A charge card can be similar to a credit card in the respect that you can use it to purchase products or services without cash to be paid at a later date. One of the differences between a standard credit card and a charge card is that charge cards tend to have a more open-ended spending limit, sometimes limitless, which can be helpful. The most important difference between the two is that charge cards require that your balance is to be paid in full every month or possibly be subject to, up to a 30% fee on the remaining balance. Whereas mentioned above, credit cards can carry over a balance without penalty but include interest on the remaining balance (usually lower).
- Service credit. Service provider agreements are all credit arrangements. Monthly you receive services such as cell phone service, electricity, heat, home internet or possibly even a home phone (ya that’s still a thing lol). These types of services are under an agreement that you will pay for them each month. Most service accounts are not reported in your credit history unless you are behind on your payments and/or receive a dreaded disconnection notice then they are known to pop up on your credit report unannounced.
- Installment credit. Two examples of instalment credit are mortgages and car loans. Installment credit is when a creditor loans you a specific amount of money that you apply for, upon approval you agree to pay back the loan amount plus interest in regular payments at a fixed rate over a certain period, agreed upon by you and the lender, prior to signing the loan agreement.
WHAT IS A CREDIT SCORE
A credit score is a numerical value based on your credit report. It can range from 300-900 depending on a number of factors listed below. Higher is always better, having a lower credit score could mean higher interest rates when applying for new credit or possibly being denied new credit altogether.
How your credit score is calculated.
- 35% is based on your payment history (paying bills on time and in full/not missing payments)
- 30% of current debts (your credit utilization)
- 15% credit history (previous debts on file good or bad credit rating, preferably not bad)
- 10% new credit applications (hard inquiries on file and their outcomes)
- 10% of your types of current credit (mortgages, credit cards, car loans etc.)
WHAT IS A CREDIT REPORT
A credit report is a breakdown of exactly what makes up your credit score. Here you can find your personal information, current address, previous address, employment information current/previous. A credit report can show you what you have outstanding in debts, loans, lines of credit and previous forms of credit. Here you can also find any inquiries, late payments, collections, public records as well as any derogatory/non-derogatory credit history you might have. Other things you can find here are your payment history and your credit utilization (balance-available balance ratio).
*If for any reason, you see any discrepancies on your credit report you should be sure to report them right away as they could change your credit score significantly.
THE EFFECTS OF BAD CREDIT
High-interest loans or credit cards are the most prominent effects of a bad credit score. I recently got a loan (having a not-so-good credit score) which I will not name this company because I am not happy with their proceedings. This loan came with a 46.95% interest rate! can you believe that? 46.95% is insane, I was given a promise that after 6 months of on-time payments I would be given an interest reduction offer. It wasn’t what I expected. Guess how much they offered to reduce it by (see below)? Not what you would think.
WHAT IS GOOD CREDIT FOR
Good credit can be used to make major purchases such as a new car or house, credit can also be, just a great convenience. Having good credit could be a deciding factor when applying for a new job or rental home, in that, it can show just how responsible you are and could be used in the final selection process.
WHAT NEEDS TO CHANGE
I currently work full-time. At my full-time job, I work with a lot of teenagers. When I was discussing my ideas about what to talk about for my next blog post. I was talking about credit and what I had learned. That was when I was asked the biggest most important question ever, “what is credit for?” kids do not know. Why don’t they know? why don’t they teach the youth of today about credit? If credit is such a big part of the grown-up world, shouldn’t they know, shouldn’t we prepare the youth of today, the millennials to be financially aware? Are we just trying to set them up for failure? Something needs to change!
GUESS WHAT MY INTEREST REDUCTION RATE WAS??
Please comment below, thanks for reading.