In the United States of America, you are judged by financial institutions using what is called credit. Without it, it is going to hard for you to afford certain comforts in life without working all your life for them. As a working class adult, it is important you know about credit and credit score in order to succeed in this country of ours.
Otherwise, life would be very hard.
This is because there are things your salary cannot buy, unless you have good credit. Or else, you would have to save for a very long time for them. Examples include a house, a car, a good education or an apartment. With a good credit, you can afford these things quicker than when you save for them.
This is because your ability to borrow loans or lease a property is determined by your credit. Credit is your borrowing ability. Your credit history is ranked with a credit score.
What Is A Credit Score
A credit score shows whether you are good at meeting bills deadline or repaying any borrowed loans. Simply put, it tells lenders your ability to repay any loan. It is available for authorized financial institutions to see. Usually, they will need your permission to access it.
But, it is one of the requirements for parties interested in parting with their money. This include banks, car dealers, realtors, colleges and any other financial service. Why does a credit score matter, dear WeeklyBagel Reader?
It is used to weed out people who have a record of not paying back money. Since lenders are often looking out for their business interests, they do not want a person who takes their money and not pay back at agreed time. Hence, the need for a credit score.
Credit Score Range
There are different credit score ranges. The 5 levels of credit scores are poor, fair, good, very good and excellent. These ratings are attached to a range of numbers.
A credit score ranges from 300 to 850. The table below explains what I mean by a credit score range.
Credit Score | Ratings |
---|---|
300-579 | Poor |
580-669 | Fair |
670-739 | Good |
740-799 | Very Good |
800-850 | Excellent |
As you can see from the table above, 800-850 credit score range is the highest rating for a credit score. 300-579 credit score is considered bad. It could severely limit you by denying your access to a life of comfort or giving it to you at a high cost.
Yes, I know. It is terrifying, is it not?
The higher you are on the score though, the better your chances of getting approved for a loan or other services asking for your credit score. The lower your credit score, the lower your chances of getting a loan. And, the higher your chances of getting any loan at a high interest rate.
Credit Score Determining Factors
Credit score determining factors include your payment history, the number of debts, credit history timeline and debt amount. What factor most affects your credit score, dear reader?
Your payment history has the biggest impact on your credit score. This is because it establishes your ability to pay back debt in agreed time. Further, this is what could either improve your credit score, or damage your credit score.
A good payment history will improve your credit score. A long credit history creates financial trust in any lender. No one wants to lend to an amateur. By an amateur, I refer to a working class adult who does not have a credit history.
It is not personal. Lenders want to see you have managed to acquire debt before and paid it all off.
Additionally, the debt amount to salary ratio also determines your credit. For the average working class adult, I recommend having a small number of debts. This is because you do not want to go into a serious debt in the name of improving your credit score.
Finally, a small number of debts work in your favor. This is especially when you are not a six figure earner. A small number of debts currently being paid off, shows you are not a wanton borrower. And, you can handle any additional debt or loan.
Differences Between A Credit Score And A Credit Report
You may have heard about a credit report. It is your credit history over certain period of time. Your credit score is calculated from your credit report. Although used interchangeable by some people, there are differences between a credit score and a credit report.
Here is how both work.
Whenever you borrow money or fail to make payments, companies are obligated to report to a credit bureau. A credit bureau gathers information about your ability to make payments towards a loan or reoccurring bill, in order to create a credit report. Then, it uses the credit report to create your credit score.
According to the United States Consumer Financial Protection Bureau, these are the three major credit bureaus in the United States.
- Transunion
- Experian
- Equifax
Besides these three, there are other credit reporting companies which can help you check your credit ratings for free. An example include Credit Karma.
If you do not have a credit report, you probably do not have any debt. Your credit report starts immediately you start paying back any borrowed loans or credit card debt. In addition, it can start whenever you are reported for not paying past-due payments like rent or mortgage.
In this case, the result can damage your credit score. Do you see the difference between a credit score and a credit report now?
What Could Damage Your Credit
What hurts your credit score, my good reader?
Unpaid debt. Oh yes- it is as simple as that. A honest mistake such as missing a credit card debt payment deadline, can unwind months of building a good credit history.
This is why companies will always reach out before reporting you to a credit bureau. If you are not willing to come to some payment arrangement, they will often make derogatory remarks about you to the Credit Bureau. As a result, you lose credit points and have a bad credit.
It is completely legal.
the disadvantages of having bad credit
Besides the impact on your credit ratings, here are other things to be worried about:
- High interest rates on loans. Lenders will charge you a high interest rate to borrow loans. As a result, you will not have a lot of loan choices. This is because most lenders hate taking financial risks, when it comes to people with bad credit.
- Your apartment or home leasing office will require a higher-than-usual security deposit to secure a home.
- It is going to be hard qualifying for credit cards. Even when you qualify, you will be charged a higher than usual interest rate. This is regardless of your income.
- Finally, expect your mortgage rates or insurance premium to be higher than usual. Again, this is because financial institutions see you as a risk.
These are the major four effects of bad credit history. As a working class adult, they will affect a big section of your life. So, be sure to avoid credit history problems.
Having said that, here is what builds your credit.
Building Credit Score
You can recover from a bad credit score. This is one generous thing about our American credit rating system. We are all given a chance to improve credit score ratings.
Firstly, there are services like Credit Repair, which can help you repair a damaged credit score. They show you the credit issues you have and help you fix them. Personally, the easiest way to repair a bad credit is to apply for a credit card.
You can apply for a small credit card. This is especially, if you are starting out as a beginner. I always recommend going for a credit card with no interest or fees for the next 6 months. It is enough time to build credit fast, before the interest kicks in.
Just spend a little and make the arranged monthly payment to the credit card company. Please do not get carried away by your credit card fund. Like I mentioned in What Not To Do With Your Credit Card, credit card companies are not your friends.
And, their money is not for free.
To keep maintaining your good credit, just be on time with your current monthly payments. To rephrase it, I mean be consistent with payment of bills. These things will affect your credit score positively.
My article, Getting Your First Credit Card, shows you a step by step approach to acquiring a credit card. That way, you do not fall victims to credit card sharks out there.
Finally, you can build your credit without a credit card. PerPay can do it for you. It actually simple. You do your normal shopping through them. Then, set up an automatic payment and choose payment duration. And, watch your credit score increase within a few months.
Why It Is Important To Build Credit Early
A good credit history will lower any loan interest rate than no credit history. This is why it is important to start building your credit early.
There will come a time in your life, when you are ready for a house, an education, a car and other upgrades in life. Most of these require a loan. It will be hard for you to afford these comforts without good credit. With a good credit history, you can afford just about anything in the United States.
Besides, you can resolve an error on your credit history if you have built your history long enough to know how the American credit system works.
So in summary of this article, credit is King in America. You can be a high income earner, but without a good credit history, you will struggle to get big loans to finance your dreams. As a working class adult, it works in your favor to establish & maintain a good credit history.