Credit is the idea of receiving something of value now and promising to pay it back at a later date. It is usually associated with a credit score, a three-digit number ranging from 300-850, which represents one’s creditworthiness. FICO is one of the most widely used credit scores.
Your credit score is impacted by the 5 C’s:
Your goal should be to control the first 4 C’s when it comes to your credit score.
Similar to the description of interest rates within the banking section, the goal is to have the lowest interest rate possible for any debt.
There are many ways to build your credit. When considering the overall makeup of your credit score, payment history plays the largest role and has the biggest impact on credit. Anything that bears your name can hurt or help your credit. So be sure to always pay your bills on time.
Credit cards are considered revolving credit. This means that as you pay off the debt you can still charge against that total amount. Your monthly payment for your credit card depends on the balance owed. As your balance increases, so will your monthly payment. Having a consistent payment history will help your credit. However, missed payments and large balances will negatively impact your credit.
Many credit cards have special programs such as cash back, no annual fees, or airline miles as added perks. Choosing the credit card that is best for you depends on your goals. Additionally, it is important to choose a card with the best rate.
Taking out a small personal loan is another way to help build your credit. This entails taking out a lump-sum of money and then making monthly payments to pay off the loan. The difference between a personal loan and a credit card is that when you pay it off it is done.
Ideally you want to stay below 50% of your available credit limit. Managing your debt and credit is an important skill that requires a delicate balance. If you are paying more than 20% of your income towards debt (not including a mortgage), you are considered to be at risk with your finances. Strive to keep this number below 20%. It’s never a good idea to max out your credit card, always keep the balance as low as possible.