So, I originally grew up in a country where you pay for everything in cash. That is from buying a car to building your house. If a young working class adult cannot afford it, then he or she cannot have it. It was a shock to me, when I learned I had to build a credit history in order to qualify for a loan to get my first car in the United States of America. That was my intro to building credit in America.
What did I know, my dear reader?
Absolutely nothing about the American finance system in my early twenties. I was just a naive young working immigrant. I was not ready to fork over $15,000 cash for my first car. And sincerely speaking, I did not have such an amount.
Best believe that amount got me figuring out how I could get a good credit score to finance a car. It was nerve wrecking, because I did not know better. I learned as a young working class adult then, how much having a credit could dictate your access to certain comforts. This includes having an apartment too. It is how much of a grasp credit has on the working class.
Someone might rightly ask, “Why the emphasis on the working class, Mr. Chimé?”
Well, most people with money would pay cash for things they can afford to pay cash on. Unless we have tens of thousands of dollars breathing in the bank on our behalf, working class adults like you and me need to finance certain purchases. Personally, I would not pay cash for anything which costs me $10,000 and above. This is even if I had $270,000 savings.
The reason being I know how many weeks I have to work to raise the amount. I do not think I am brave enough to give that huge amount of money away. I do not know about you, but my survival mode instincts will not permit me.
Hence, why building credit is crucial if people like you and me want to afford certain necessary comforts of life. Credit is king for the young working class. Do you believe that, my dear reader?
What Credit Means For You
It is simply your ability to borrow and pay back debts in a timely manner. The nicer it looks on your record, the more opportunities you will have. What do I mean by this?
So, there is a record each time we borrow money from the bank or lenders. This is called a credit history. On your history, it shows things like how much debt you have and presence or absence of late payments.
Also, things like consistency of payments and length of payments are there too for every lender to see. Now, no lender can access this record without our permission. But when we give this permission, they will see everything within the last seven years.
Oh yes.
It is why I advise being on your best behavior when building credit for the first time. Our past credit behavior will always dictate whether a lender will loan us money or not. This is due to a history of repayment compliance.
Hence, why lenders or rental businesses always want to run a credit background check on us.
Simply put, our credit history makes lenders consider giving us loans while credit score determines at what interest rates we access them. They know bad credit history means we are not going to be trusted to pay on time. Whether we are good people or not, does not factor into it. What matters is our ability to borrow and pay back without the hassles of lenders chasing after us across the states.
How Credit Score Factor Into It
Remember when I mentioned about credit history giving us a chance of being considered for loans while credit score determines at what interest rate?
Well, it turns out we could still qualify for loans at an interest rate which is utterly ridiculous. Although there is a federal regulation of the maximum interest rate lenders could charge us, a bad credit makes lenders push for the highest within the limit.
That is the effect of a credit score on you. It is regardless of the size of your savings. Whether you have a million dollars or not, does not matter with respect to accessing low interest rate on loans. What matters when it comes to accessing good interest rates is your credit score.
Speaking of credit scores, I want you to know it is classified as a range in the United States. A credit score ranges from 300 to 850. Each range is classified as the following below:
| Credit Score | Ratings |
|---|---|
| 300-579 | Poor |
| 580-669 | Fair |
| 670-739 | Good |
| 740-799 | Very Good |
| 800-850 | Excellent |
Currently, my credit score is in the good range. I am yet to meet anyone in the excellent range, but I know there are other young working class adults out there who are doing better than me. But, the ranges above all mean something.
Each one determines what interest rate you are going to get when you go to get a loan. A poor credit score will get you the highest interest rate available. This is because it is basically saying you are bad at paying back debts. Maybe you are not, but banks and lenders usually think it is why you get the score.
Your interest rate starts looking good when you are on 670 and above. I had a friend who got $120 car note with a low interest rate on the same car I got $208 car note on. This is because her credit score was in the excellent range.
Types Of Credit Score Models
The American credit score model is classified into two. I figured I would let you know, because it is important to which one to check. The types of credit score models are:
- FICO score: Banks and lenders use this one to evaluate what interest rate to give you. I have observed this credit score model is the standard for financial industry.
- Vantage score: Small businesses use this to evaluate your credit worthiness. By small businesses, I refer to apartments.
I actually have a guide, everything you need to know about credit and credit score. You can read it to learn more about it. As I mentioned on this episode, this is just intro to building credit episode.
Anyways, this is all I want you to know about building credit for now. It is hard to afford most necessities without financing them. Hence, why you need a good credit history in order to qualify for loans. So, keep building that credit slowly until it is good enough to get you low interest on loans.
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