In today's financial world the most important things is knowing the importance of your credit history.
If you are like 99% of all Americans, you do not have a large reserve of cash sitting in a bank to pay for a home, a car, your education or a myriad of other things that you may have listed for your personal American Dream.
Understanding the importance of credit can help or hinder your dream. This is an important step to establishing your future financial freedom.
Find out what is credit and how to use credit to save money. The first part of understanding your credit is to know what your credit rating is and what it represents. A credit rating is a number that reflects how financially strong you are and is generated through the purchasing of products over time. When you purchase products and pay for them over time, that payment history is often reported to one or more credit reporting companies.
You can request a copy of your credit report by contacting any or all of the following main credit reporting companies:
|PO Box 740241
Atlanta, GA 30374
|PO Box 2002
Allen, TX 75002
|PO Box 2000
Chester, PA 19022
These companies create a score that represents, among other things, how often you use your credit, how much credit you borrow, how often you were late paying your bills, how much you owe and if you have taken any bankruptcies. The more responsible you are when using your credit, the stronger your score becomes.
You can save tens to hundreds of thousands of dollars by using your credit responsibly. The highest credit rating you can have is usually called "AAA" or triple-A credit, while "D" is the lowest rating. The stronger your credit is, the lower your interest rate will be on a loan. For example: Say you want to buy a $150,000 house in a great neighborhood. Your credit report indicates that your credit, like most American's, has a few missed payments here and there so you come up with a "B" credit rating.
The bank offers you 8.25% as your interest rate which gives you a monthly payment of approximately $1,126.00 a month. By comparison, if the bank saw that you had an "AAA" credit rating they would be more confident that you would repay the debt and would offer you a better interest rate, say 6.75%, which in turn would lower you monthly payment to $972.00.
The real savings, however, is not just the lower monthly cost, but in the interest you save. The table below shows the totals from a standard 30 year mortgage and the savings a good credit rating can make.
|$150,000 Mortgage Comparison
||Total Loan Paid
The difference of $55,441 is what you saved! And all because of a difference in your credit rating. This is why you need to know the importance of credit.
Here are some helpful tips to building a strong credit rating
Use credit but, make all of your payments on time. This may be the single most important factor of establishing good credit. Even though many companies may have a 15 to 30 day window before they report a missed payment, it is not worth the risk of damaging your credit.
Budget your expenses so you have enough to pay your debts. A bounced check sends a signal to potential lenders that you may not be able to manage your finances and decreases your credit score.
In order to obtain a credit card without a co-signer, you have to be at least 18 years of age and show proof of a source of steady income. Gas cards (credit card offered by big gas companies, such as Exxon Mobil, for use at their gas stations) are relatively easy to get approved for. You can use this as your first credit card and to establish credit. Make payments on time every month.
If you can't get a credit card alone, ask someone who you know closely and who can co-sign the credit card for you. A relative who has an established credit history is a good source to turn to. He/she can leverage his or her good credit in helping you to get your credit card. Remember to make payments regularly and on time to establish your own credit.
One of the best ways to establish a credit history is by applying for a small loan or line of credit from a local bank. Another way is to apply for a credit card from a local department store. Ask whether or not they report to a credit bureau. If they do, applying for a card or loan with them can help you to establish a credit history.
If you don't already have a checking account, you need to open one. Without at least a checking account, you will have very little credibility with lenders and creditors. It would be even more preferable if you have a savings account as well.