CEE Standard: Using Credit
Credit is something that every student will use in their lifetime. This article will help them figure out the important parts of credit usage and understand how to use and how not to use credit!
At some time or another, you’ve probably heard your parents chatting about credit. While these conversations may not mean much to you now, you’ll wish you’d listened closely when you get into the real world. Learn as much as you can early, so you can save yourself a ton of money (and possibly time) later.
What Is Credit and Why Do You Need It?
What is credit? In a nutshell, it’s the ability to receive goods or services and pay for them at a later date. Beyond purchasing goods or services, there are other reasons why you may need to have solid credit:
- Qualifying for a credit card, personal loan, a loan for a new car or home, or other debt product
- Qualifying for a rental home or apartment.
- Bypassing security deposit requirements for cell phones, utilities, and other service providers.
- Qualifying for employment (Yes, some employers will look at your credit report).
What Is a Credit Report?
A credit report is a document that “contains your credit history as reported to the credit reporting agency by lenders who have extended credit to you,” according to MyFICO. In a nutshell, it’s all your credit activity since you’ve been active in the credit world. It contains identifying information, credit accounts, credit inquiries, public records, and collection accounts.
You can retrieve your credit report from each of the credit bureaus, free of charge, at AnnualCreditReport.com.
When attempting to access your credit report for the first time, you may get an error message from the credit bureaus, indicating that there isn’t enough information present. Don’t fret. This just means that you have a thin file, or not enough information to generate a credit report or score.
What Is a Credit Score?
A credit score is a three-digit number, ranging from 300 to 850, that is used to gauge the riskiness of a borrower. The better your creditworthiness, the higher your score–calculated on various parts of your payment history, as shown in the graphic below. Although there are various scoring models on the market, also referred to as FAKO scores, the most prevalent model is FICO. Your FICO score is made up of:
What’s the Big Deal About Credit?
Since borrowing money usually comes at a cost, the better your credit score, the cheaper it is to make a purchase on credit.
And in some instances, having poor credit could cost you even when you wish to pay cash for a purchase. For example, if you’re attempting to turn on your utilities for the first time in your apartment or purchase a new iPhone, you may be required to make a hefty security deposit if you have a low credit score defined generally as anything below 670, according to Experian.
Now I know you’re just a teen, and you may be thinking, “I have a way to go before any of this stuff matters.” You may be right if you’re on the younger end of the spectrum. However, I can assure you that being knowledgeable about credit and debt will help you be more proactive when borrowing funds, such as student loans, or borrowing on credit since you’ll understand how it all works and what costs are associated with it.
How to Start Building Your Credit
Credit scores take some time to build up but can be destroyed by a single mistake, such as making a late payment. Fortunately, most credit missteps won’t haunt you forever. Here are some ways to start beefing up your credit score:
- Practice responsible debt-management before you even have any by paying your bills on time.
- Get a secured credit card and keep the balances low.
- Become an authorized user on your parent’s credit card.