Why does credit matter? Your credit is important because it can save you thousands of dollars every year. Everything that you must borrow will be cheaper if you have great credit.
Everyone wants the highest credit score possible. How can someone achieve an 800+ credit rating? Great credit management. How does one manage his or her credit effectively?
There are two great ways to manage your credit--credit cards and loans. Credit cards are convenient, easy, and have many perks to go along with them. Loans, on the other hand, are fixed amounts of money owed to an institution that diminish your net worth. Keep reading to see how to utilize these two forms of credit to benefit your credit worthiness.
*Note* You must have some form of credit for any of the information below to apply.
Credit Cards
Most people already have at least one credit card. Credit cards are known as "revolving credit." This credit is extended to you each month. In return, your creditor is hoping that you borrow too much at one time so that you pay huge amounts of interest. However, at The College Finances, we are smarter than that. Here are the DOs and DON'Ts of credit cards.
DO
- Pay your bill in full every single month, without fail
- Utilize cash rewards
- Use your card at least once per month
- Ask for limit increases whenever your income increases or once per year
- Spend more than 30% of your limit at one time
- Lend your credit card to others
- Pay only the minimum payment on your bill
- Carry a balance over month-to-month
- Close your credit card (ever!)
It's also wise to have at least two credit cards. Try to upgrade your current credit card as your credit improves. If you do this, not only will your credit limit increase, but your line of credit will continue to age (good), and you could get better rewards from your credit card. Take full advantage of any offers/rewards offered by your card--why not, right? It's free money just because you manage your credit wisely.
I recommend having a credit card that offers the greatest cash back for every kind of purchase you make. For example, you should purchase gas on a credit card that offers 5% cash back on transportation expenses. You should have another credit card that offers 5% cash back on dining expenses.
*WARNING* I am not endorsing "store" credit cards. Their perks are not very good, and some store cards don't even report your activity to the major credit bureaus. Avoid store cards and stick with major financial institutions.
I also recommend checking out www.creditkarma.com for actively managing your credit. They provide you with a TransUnion score and show you where you can improve your credit score. The number they provide you isn't your FICO score, but it's good enough to interpret where you're at and where you want to be. Best of all, as of 12/21/2014, it's free.
Loans
There are several types of loans--car loans, mortgages, personal loans, and student loans. All are very similar in how they affect your credit. Loans are considered "installment credit." This credit is loaned to you at one instance, and you are expected to pay it off on a predetermined schedule. I recommend you have an active loan at all times in order to diversify your credit report and show that you are a responsible borrower.
Student Loans
These loans are the most preferable to have active. You can have them deferred while you are attending school--which does not affect your credit--and pay on them after you graduate college. The federal government offers two kinds of student loans--subsidized and unsubsidized. Depending on your family's income, you will be offered either both loans or just unsubsidized loans. Unsubsidized loans collect interest while you attend college, whereas subsidized loans don't collect interest while you attend college. Also, subsidized loans have a slightly lower interest rate. The loans that are wonderful for your credit are Federal Perkins student loans. They report as being paid each month while you're attending college. These loans are only available for low-income students who qualify for subsidized federal loans, and they're not offered by all universities. Make sure to establish a repayment plan with your student loan provider that has no more than a five-year term. Otherwise, it could negatively affect your credit due to the "payback" time period.
Personal Loans
Personal loans are loans you take out with a financial institution in order to cover an unexpected expense. The unexpected expense can range from a broken transmission to paying for higher-interest debt. Never pay for an unexpected expense with a credit card unless you can pay it off within that billing period. These loans offer an opportunity to also build up your credit by creating an installment loan on your credit report. As long as you pay these on time every month, they will be an asset to your credit. You can also use these loans to pay off high-interest debt that you have neglected to pay off--just make sure the interest rate on the new loan is lower than your old debt. Ideally, however, you should have a rainy day fund saved up so that you don't have to take on this loan.
Auto Loans
This should be the first voluntary loan that you take out. Car loans are the baby version of a mortgage--they are less expensive and typically are the first step after college. It's a good idea to take out an auto loan after your credit rating reaches 720+ for a great interest rate. If your rating is not there yet, continue paying on student loans and your credit cards. However, if you don't have student loans, it may be wise to take out a $1,000 secured loan with a short term in order to build your credit up to your desired level. The interest rate on these loans (as of 12/21/2014) can be as low as 5%. 5% of $1,000 is much less than the difference between having a 10% interest auto loan or a 2% interest auto loan. Even better, some auto companies offer 0% interest to those who have excellent credit during certain seasons. Make sure to be on the lookout for these whenever you're trying to finance a car.
Mortgages
Ah, yes. The big daddy of all loans. This loan can range from as low as $50,000 all the way up to $1,000,000+. This loan should be the last one on your list since you want a very low interest rate. A huge loan like this can cost you thousands more per year if you take on this one first. You want to have a great history with student loans, credit cards, and an auto loan before you take on a mortgage. I recommend having a credit rating of at least 780 before signing for a loan. You will receive some of the best rates available. I also recommend signing a mortgage for no longer than 15 years so that you can either upgrade your house in the somewhat-near future, or you can live mortgage free for many years to come.
If you follow the steps listed above, your credit rating will be strong and propel you through your financial future. If you still have any more questions, please feel free to comment with them below. Thank-you for reading!
No comments:
Post a Comment