Credit is something very few people truly understand no matter their age, and this statement is even truer for younger people. The tragedy here is that so many young people make financial mistakes in their twenties, and it doesn’t help that many credit card companies like to target young customers. These mistakes can then affect their whole lives if they let things spiral out of control. Let’s take a look at a few things all people should know about credit so you don’t end up committing costly mistakes.
An Early Credit Card Can be Both a Gift and a Curse
Some people may advise that you stay away from credit cards at all costs if you’re young, but not so fast. How are you going to build your credit if you don’t have a history? The truth is that the best thing for your credit is to have a few accounts open but use them responsibly. This will show that you are active and generating income, but also that you can be trusted with credit. This is why you should consider getting at least a low-limit credit card, but have a clear plan for using it. You could use it to pay for your monthly bills and necessities, then have an automatic payment system set up so you can pay your card in full every month.
Don’t Make too Many Applications
One thing you should avoid, however, would be to sign up for too many offers at once. Making too many credit inquiries in a short period shows desperation and will affect your credit. This goes for anything that will trigger a hard inquiry on your credit report, so be careful.
Credit Utilization Ratio is Essential
One of the biggest factors used to calculate your credit score is your credit utilization ratio. This is the ratio of the credit that you are using versus your total limit. The higher the ratio, the more it will affect your credit negatively. There is no hard rule for this, but many advise that you only utilize about 30% of your total credit. Not only will it help your credit score, but it’ll give you more room in case you need to make an emergency purchase.
This is also why it’s not the best idea to close credit card accounts after paying them off. This is because taking one card out will increase your credit utilization ratio. Instead, we suggest you tuck it somewhere safe while trying to keep the balance as low as possible on your other accounts.
Another reason why we would advise that you don’t close your accounts is because of another major credit score factor: account age. Closing a long-standing account will reduce the average age of your accounts and will affect your credit negatively, so think twice.
You Have More than One Credit Score
A lot of people seem to think that there’s one central credit score that all lending institutions look at, but that’s not the case. Each credit reporting agency will have its own score, and these can be read very differently. While a certain score may look great with one agency, it will be bad with another, so you have to make sure to understand how each agency ranks people and what those rankings mean.
For example, someone with a 466 score with Equifax will be considered to have an excellent credit score while it would be horrendous by Experian’s standard. So, make sure that you study each of these agencies and don’t be afraid to ask questions.
Check Your Credit Reports Often
Note that you are entitled to an annual copy of your credit report from the three major credit reporting agencies, so take advantage of them. This is because reports can often have mistakes on them, which could seriously ruin your credit. In some cases, accounts that you may have settled may still be there. If you spot any irregularities, these agencies will make it easy for you to make amendments. You will usually have to fill in a simple form and provide any supporting evidence that you can.
No Credit Check Student Loans Can Still Affect Your Credit
There’s a lot of misunderstanding when it comes to student loans and credit scores. Some people may think that because there was no credit check that their student loan will not affect their credit. Do student loans affect credit scores? The reality is that it will depend on the type of loan you’re taking out, not whether there was a credit check or not.
If you want more information on this, you should check out this article on student loans and your credit score by Tally. They run down some of the most common student loan options and look at how they can affect your score. They also explain some of the long-term credit effects of no-credit-check loans to help you find out if they’re a good choice for you.
Bad Credit is not Forever
Everyone makes mistakes, and there’s a strong chance that you will make one or a few with your credit. If you already have credit problems, don’t panic. There is a statute of limitation on how long entries can stay on your credit report. Bad entries will only stay on your report for 6 years in most parts of the country. From then on, you can start working on repairing it.
Credit Repair Works
You may have assumed that there is nothing that can be done to repair your credit or that credit repair services are a scam, but you’d be wrong. Credit repair does work, but you don’t necessarily have to work with professionals.
One of the simplest ways to improve your credit on your own is by picking up a secured card. These will allow you to deposit a small sum of money that will work as both collateral and the credit limit. You will then be able to generate positive financial activity and rebuild your credit this way. You have to make sure that you use it with extreme care, however.
We would also suggest that you speak with some of the people you owe money to. You need to come to an agreement with them. Most of them will be open to negotiations and you’d be surprised by how much they’ll be ready to lower your debt if you agree to pay in a few lump sums.
The only thing you have to do is get the agreement in writing that they will remove the entry from your credit report. This will ensure that you actually get credit benefits from doing this.
Your Bank Credit Score is Often More Important
Another thing a lot of people aren’t aware of is that the relationship they have with their bank can be just as important as their credit score, even more so in some cases. If you are known for being a good customer, some banks will overlook some kinks in your credit report and extend loans to you. It pays to have a good relationship with a bank, so try to be loyal and treat these like gold.
These are all things every young person should know about credit. These tips could allow you to build a solid foundation that will help you your whole life, so make sure you follow them to the letter.