GOT CREDIT?

  

 You’ve probably seen commercials offering low interest rates or even a 0% interest rate on car loans for people with ‘good’ credit. Listened to some friends and family members talk about how they have ‘bad’ credit. Possibly were turned down by a landlord for not having any credit. Or maybe even heard an ad from a company offering to fix your credit. And all the while just secretly thinking to yourself ‘What the hell is credit?’ 

    No worries, we’ve all been there. This post will answer that question and many more. Credit is another topic that is too vast to cover in one post, so I will break it down over a series of posts. Today, I will go over what credit is, why you need credit, and how to get credit when you’re just starting out.

 In the upcoming weeks, I will breakdown credit scores and the factors used to measure your score. I will also explore what habits you should adopt to help your score grow and what programs and services are out there that can help get you back on track if you’ve already fallen down the ‘bad credit- rabbit hole’, so stay tuned.

Now let’s get to it!

What is Credit?

    Experian, one of the three largest consumer credit reporting agencies (Equifax and TransUnion are the others), defines credit as “the ability to borrow money or access goods or services with the understanding that you'll pay them back later. Lenders, merchants and service providers (known collectively as creditors) grant credit based on their confidence that you can be trusted to pay back what you borrowed, along with any finance charges that may apply.”

    The concept of credit may seem intimidating, but in reality we experience the concept of credit in our ordinary lives. Everytime a friend, family member, or associate asks to borrow money from you, essentially, they are asking you for ‘credit’. In this case, you would be the ‘lender’. The ask is usually followed-up with a ‘I’ll pay you back next week.’ or ‘I got you the next time I get paid’. This is the understanding that you will be paid back whatever it was that you loaned out.

However, we all know that one person who always wants you to ‘loan them’ money, but before they even finish asking, you already know you’re never going to see that money again. Yeah, this is what creditors are afraid of. This makes them less likely to want to loan or ‘credit’ you money just like it makes you groan when you know you're about to get hit up for money from ‘that friend’. Bottom line: Don’t be that friend and don’t get the reputation of being that friend. It’ll come back to bite you in the ass when you really need to borrow money and no one is willing to lend it to you. 

Now what about that friend that may only ask to borrow money from you once in a blue moon? They always pay you back. You’ve never had to hunt them down for it? You’ve never questioned whether or not you would get your money back. Why? Because this person has become worthy of your trust. They have built up your confidence in their ability to pay you back; they have built ‘good credit’ with you.

Subconsciously and without even realizing, you have internally given these two types of friends ‘credit scores’. But we’ll dive deeper into this in my next post.

Why You Need Credit.

    Unless you plan on living under a rock for your entire life, at some point you will need to get credit. Buying a car? A house? Well, unless you are Rich Uncle Moneybags (lol), you’re probably not going to have that kind of money laying around to just buy these things outright. Meaning, you are going to need to borrow money from a creditor.

But it goes further than that. Even if you’re not trying to make a large purchase, a lot of service providers such as utility companies, landlords, insurance companies, and to some extent, some employers want to know that you are reliable and that you will not be a liability. Therefore, you’re going to need to get yourself some credit.

So, How Do You Get Credit?

    There are a number of ways that you can start building your credit. I’ve laid them out below.

1. Get a Co-Signer

This is probably one of the easiest ways to get a jump-start on building your credit and potentially getting you approved for a loan. A co-signer is your back-up. They are essentially telling lenders that they will be responsible for paying back the loan if, for some reason, you fail to. Your co-signer literally has your back and is sticking their neck out for you, so don’t be a jerk and screw them over! Make sure you make your payments! Most co-signers are parents, family members or close friends. My parents co-signed my first credit card and car loan and I’m grateful that I was in a position where they could do that for me. Not everyone has this privilege: so if you do, be thankful for it.

2. Get a Secured Credit Card

I didn't know this was a thing before I started doing my research, but a secured credit card can be a good method to use if you are starting from scratch. You use it the same way you would use a regular credit card, making purchases and paying off/or making payments on your balance every month. The major difference is a secured credit card is backed by a deposit that you make upfront to the bank. The deposit is generally the same amount of the card limit. What I mean by that is that it gives the bank a sense of security that they will not lose anything, making them more comfortable to take a chance on you in the first place. Keep in mind, a secured credit card is meant to be temporary and only used to help build your credit to the point where you can qualify for a non-secured or regular credit card. Need help finding a secured credit card? Check out this review of the 6 Best Secured Credit Cards.

3. Get a Credit-Builder Loan

This is a loan geared specifically for those trying to build their credit. Pretty self-explanatory right? (lol). A credit-builder loan, however, is quite different from a traditional loan. One big difference is that you do not receive the loan money (well at least not upfront). Instead, it is placed in a bank account (serving sort of like a savings account) and you make fixed payments over the course of time. At the end of the loan term, the lender will return the total amount of the loan to you (most likely with interest!). Here’s an article for more information on Credit-Builder Loans.

4. Become an Authorized User

This is where a close family member adds you as a user on their credit card. This essentially adds their payment history for that particular card to your credit files giving it a major boost. Keep that in mind when determining if this something you’d like to do. You want someone with a long history of paying and most importantly paying on time.  Also, you don’t have to have access to the credit card or even use the credit card to reap the benefits of being an authorized user. My mother has done this for a couple of family members.

5. Utilize Rent-Reporting Services 

Signing up for a rent reporting service is a great idea. I mean if you’re paying rent monthly and on-time anyway you might as well use it to help benefit you in the long run. Nerd Wallet wrote a great article on how to report your rent to credit bureaus. Check it out for information on what companies offer this service and questions you should ask a rent-reporting service before signing up.

Hopefully this is helpful for anyone who is just starting out and trying to figure out how to start building their credit. For those of you who already have credit, but still don’t quite understand what a credit score entails or why your score is slow to rise, be sure to drop by next week!