What is Credit and when should you start building it? Having credit can lead to personal finance success. It can open up the door for potential fantastic purchases you and your family will enjoy. At Republic, we want you to live your best life. Let’s talk about the basics of Credit and some considerations of Credit Cards to get you on that path.
What is Credit?
Simply speaking, Credit is debt. You’re promising to pay someone back for something that you buy. A few examples of why you might need Credit are:
- House Mortgage
- Car Loan
- Student Loans
- Opening a Credit Card
Typically, those institutions which allow you to borrow money to pay for something are Banks or Credit Card companies. Your Credit Score is what those institutions use to judge how trustworthy you are to pay them back fully and on time. They will then approve or deny you for your loan.
What is a Credit Score?
Your Credit Score is a measurement of your history of Credit. This indicates how likely you are to continue on that trend with new lines of credit. Some pieces of your history that influence your score are:
- Payment History: Have you paid your bills fully and on time? This can include things like your utilities in addition to your loans.
- Types of Credit: Do you have large loans from banks or just Credit Cards?
- How long you’ve been using Credit: The longer, typically the better.
- Current Debt amounts: Are you going to be able to cover this new credit given your current debt?
- Public Records like Bankruptcies
- How many Credit and non-credit accounts you have and how many you’ve applied for.
How do you build Credit?
If you don’t have a high Credit Score but are looking for ways to build it, we have some suggestions:
- Open a Joint Account with someone (typically a family member who you trust) who has good credit. This shows that this person trusts you, which helps banks see the same thing.
- Get an Auto Loan. These are typically among the easiest loans to get, even with a low credit score. You may have a higher interest rate, but paying that back on time will do wonders for your score.
- Pay off student loans or home mortgage on time. Many college students finish school with a terrible credit score if they haven’t paid their student loans diligently.
- Open a Credit Card, but also…
- Pay off Credit Cards fully each month and on time. Nothing impacts your score more than missing a payment or taking longer each month to pay back your balance. Even one or two of those will stay on your report for years and may be questioned later on. When I went to buy a house in recent years, I answered questions from the bank regarding one missed payment in college with my first credit card. I was able to explain that I paid it a few days late and satisfied their concern. This showed that they take those incidences seriously.
What to consider when opening Credit Cards
Paying with a Credit Card gets a bad reputation sometimes. Some people think that it implies you are loose with money and don’t have your finances under control.
The reality is, Credit Cards are an awesome tool for people to use who have their finances under control. They are also beneficial for people trying to build their Credit. The simple rule of thumb is, if you cannot trust yourself to pay back the full balance of the card each month on time, then a Debit Card (linked to your checking account) is a better option for everyday purchases.
Businesses know that you don’t like carrying around enough cash with you to pay for every transaction. So those businesses pay Credit Card Companies a percentage of each sale to accept a those cards. These companies therefore want you to use their card as much as possible, so they will offer you rewards depending on how much you spend. Sometimes those can include a certain amount off your bill, or travel rewards and gift cards.
What Credit Card should you get?
Unsurprisingly, this completely depends on your personal situation. The good news is, no matter your situation, you likely will be able to open a credit card. Creditcards.com is a great resource to find the perfect card for you if you’re looking for a place to start.
- If you’re just starting out, you won’t likely have a high enough score to be eligible for a rewards card, but there are a few options for you, including a Secured Credit Card. This is usually tied to a savings account and has a limit on spending up to the amount that’s in there. If you’re a student, there are lots of Student Credit Cards available to you.
- For those looking for more reward-based cards, our Finance team at Republic (a fairly trustworthy group!) has some personal favorites that many of us seem to hold:
- Everyday purchases: Chase Freedom Unlimited : No Annual Fee, Unlimited 1.5% cash back on every purchase, no matter if it’s dining, groceries, or that giant car repair you had last month. People who like having one card for everything love this one.
- Rotating Categories: Discover IT : No Annual Fee, 5% cash back on rotating categories throughout the year, like gas, restaurants, wholesale clubs, or retail purchases in Holidays, with 1% cash back on everything else. If you find yourself on their schedule, then you can rack up huge rewards.
- Travel: Chase Sapphire Preferred/Reserve : Annual Fee of $95 for Preferred, $450 for Reserve. This card uses points instead of cash back, which can then be used for booking travel at a 50% discount. They offer 2X points on dining and travel purchases, along with 1 point for every $1 of every other purchase. The Reserve comes with a $300 annual travel credit and other premium perks like VIP lounges in airports all over the world. Chase also typically offers a huge sign-up bonus upon activation which can usually pay for a trip or two by itself. Any frequent traveler likely has one of these cards at the top of their list.
- Dining: Capital One Savor : $95 Annual fee, waived for the first year, 4% cash back on dining and entertainment, plus 2% for grocery stores, and 1% for everything else. If you go out a bunch in your own town, this is a great way to make sure you can go out even more.
That’s a lot to consider for building credit and/or choosing the right card for you, but your personal finances will dictate which steps you should take. There are a ton of resources to help you manage, so continue reading around and educating yourself before making any decisions. It’s never too late to start building credit and to get excited about what options can be opened up for you!
With Republic Wireless as your cell provider, we allow you to open up even more options for your personal finances. Don’t let your phone bill hold you back from doing what matters with your money. Learn more about our service today.
As always, feel free to leave comments as well as your own learnings and insights on this topic for other the benefit from.