What is Credit?

What is Credit?

 
      First of all, credit is what, fortunately or unfortunately, limits or propels people in their ability to get credit cards and loans, increase credit or loan limits, buy or rent a home or vehicle, and even your affect your ability to get a job!

Young People

(age when one generally starts working or is able to provide for themselves and move out of the house)

     Many "Young People" have NO CREDIT, which, oddly, is worse than having BAD CREDIT. People in this group typically start with a secured credit card or need a co-signer.

A Secured Credit Card 

   ...is a card that you put your money on and then spend from. So you are the one who is essentially providing the funds and the limit. This prevents you from spending more than you can afford. A secured credit card reports the spending information associated with your card to the major credit bureaus every month, unlike the unsecured cards. This will help build your credit. So, instead of putting your money in a bank and then debiting the money out, this is a better alternative for building your credit. These types of card may have one-time fees, annual fees, etc. because, again, you are using them to build your credit. Secured credit cards typically have a minimum deposit amount of $200, which, in all fairness, was what my first credit limit was with Capital One when I was 19.

Here are a few links to take a look at some Secured Credit Card options.
https://www.creditkarma.com/credit-cards/secured-credit-cards?ckt=navClickL2

https://wallethub.com/credit-cards/secured/

Cosigner 

     ...is a person who agrees to pay the borrower's (you in this case) debt if they cannot. The cosigner usually has good credit and a longer credit history. Young People often need a cosigner. My dad cosigned for my first vehicle. Therefore, if I didn't pay my $200 monthly payment, he was responsible. This leaves the cosigner with financial risk. 

Authorized User

   ...is when you are added to someone else's credit card, generally to be able to use the card. To be added as an authorized user, one needs to provide the card holder with their: name, address, date of birth, and social security number. I've had my mother add me to one of her cards so my open credit and credit ratio would go up (explained below). I told her I did not need an actual card and never wanted to actually USE the card, but I wanted to piggyback off of her credit limit; she had a card that had a $6,000 limit with less than $1,000 on it at a time. Now, before I explain the other two terms, let me just say this can backfire*. 

*My best friend's husband found out that they were not being refinanced for their mortgage because a credit card on their credit report was maxed out and behind in payments. Gary, let's call him, had cosigned onto a credit card with his parents. Gary looked into the card since he was an authorized user and found out the above mentioned information. He then spoke to his father about it, who had NO IDEA his wife had a spending problem! Gary's mother had been racking up money on this credit card by charging things from apps on her phone to it. She never told her husband and her husband and son thought the card was being managed. Needless to say, this kept Gary from being able to refinance his home, hurt his credit badly, and to finish off the story, Gary's parents are now divorced. Ouch, right?

Credit Ratio/Debt to Income Ratio

   ...is the percentage of your income that is taken up by your debt. This is used to see if you are a good credit risk. If you have a lot of credit cards and loans with high balances, then you would not be a good credit risk. If you have credit cards that have low amounts charged to them with high limits and pay your bills on time, you are generally a good credit risk. People are not going to lend to you if you cannot show you don't rely on credit cards and loans or do not pay them, or pay them on time. Remember the story of Gary's mother messing up his credit? Exactly. 

Open Credit

   ...is the limit you have to potentially spend. Say you have your first credit card and your limit is $200. That is your pre-approved amount you've been given to spend. However! The general rule of credit utilization is to stay below 30%. So how do you find what's 30% and under? Take the amount x .30 ex. 200 x .30 = 60. So, even though you can put up to $200 on the credit card, you want to put no more than $60 on to to have a good credit utilization score. 

   Now, there are times I've unfortunately had to max my card out, especially if it was only a $200 limit. This was often due to car repairs or big purchases, like a computer that I couldn't necessarily save up for (thank-you grad school!). You definitely want to get the amount down on your card to that 30%. Always pay more than the minimum too. 

The Minimum 

   ...the minimum payment required for each month is generally based on the amount on your card, the interest you're charged on your card, and potential late fees. If you pay the minimum, you will not pay a late fee...unless you pay it late (obviously). However, most credit cards charge interest and if you pay the minimum, you aren't chipping away at what you're being charged to use the credit unless you have a no interest deal: ex. 36 month no interest when you spend $499 and up! 

**Be careful, because some places will charge you back interest if you're late on one payment, even if it's the last. This means you could have paid every single payment and on time, but your last payment was late or not paid at all. You may then be required to pay interest on that entire purchase over the course of the 36 months just by missing or being late on ONE payment.  Always read the fine print or ask questions. 

Interest

   ...If you have a balance on your credit card or loan, you're generally charged interest, unless, as mentioned above, you agree to a No Interest special. Each credit card has a different APR they use to calculate how much interest you will pay. Interest is basically a fee for borrowing money. Say you ask to borrow $20 and I say, "Sure, but in order to borrow $20 now, you have to give me $25 when you pay it back." That $5 different is the interest I'm charging you for borrowing money from me. The longer you borrow money, the more interest you pay. Some people decide to save the money to avoid paying interest if they don't have the credit or don't want to use credit. But, in order to build good credit they want to see that you can use credit. What a Catch-22!***

   ***A Catch-22 is a dilemma or difficult situation from which there is no escape because of mutually conflicting or dependent conditions. It's like the saying "you're damned if you do, you're damned if you don't." Also, Catch-22 is a hilarious and smart book if you ever want a good read!

Well, I hope that you learned the basics of what Credit is. My next post will be more on the Credit Repair side of things, in case you took your no credit and/or good credit down a dark alley. Don't worry, I've been there a time or two. That's how I know what I know!