There’s a lot of advice that tells us to avoid getting bad credit at all costs (pun intended). And while it’s all good advice, we are more likely to be compelled to follow suit when we are made aware of the reason behind the guidance that’s being offered to us. After all, as thinkers, we aren’t simply beholden to the words of those who are perceived to know more than we do.
What is the Starting Credit Score?
Having a credit score can have many benefits. Wait, having a good or great credit score can have many benefits. As we go through life, credit becomes an essential tool for an individual to progress through society. You can use credit to purchase everyday items, a car or a house. Without credit, some of the essential purchases we rely on to carry us through our lives every day would be unavailable, such as a car for transportation to and from work. Having a credit score and a good one at that can allow you to get the best deal on large purchases and also helps create a financially responsible person. But just how does one get a starting credit score, and where do you begin? I will lay out some of the easiest ways to start down the path of a good credit score.
Step 1 to getting a starting credit score:
The first thing you need to do to get a starting credit score is simply to get credit. The easiest way to do this that I recommend is by opening up a $0 annual fee credit card. Your monthly limit won’t be all that much, most likely less than $1000. Commit to making a couple of easy purchases on it every month and paying it off at its due date. For example, a couple of tanks of gas or a visit to the grocery store is all it takes to start building your credit. It is vital to pay off the full amount after a month’s time before the card’s due date.
Step 2 to getting a starting credit score:
The second step to building a starting credit score is to continue purchases with your credit card and meet the monthly payment date, along with exploring an additional option of building your score. If you rent an apartment, sometimes the apartment complex allows you to report your on-time payments to credit agencies. Additionally, if you have student loans you are paying back, this also will show up on one’s credit report. Time is a big factor in your credit score. It usually takes at least six months for you to build your first credit score. If you make on-time payments in full, you can expect a score anywhere in the range of 675 to 740.
Step 3 to getting a starting credit score:
By step 3, you should already have shown a positive pattern to creditors through making payments in a timely manner. The most important part of this step is just to be patient. Building a good or great credit score takes time. Two of the bigger factors that impact your credit score are the length of time you have had credit and the number of accounts you have that required credit. Chances are as you start building your credit both of these factors won’t be too much in your favor.
In summary, there are many benefits to building a good credit score, but it all boils down to a few simple factors. Firstly, you need to begin building credit through a $0 annual fee credit card, student loan repayment, etc. Secondly, you MUST make your full payments and make them ON TIME. Finally, you need to be patient. It takes time to build a great credit score, but if you budget correctly and make sure not to spend above your income level then a great score will eventually come.
Budgeting With Credit Card Debt
I recently spoke with an individual who was excited to begin his budget. He downloaded the spreadsheet available on my site and asked me to look over it. Everything looked good except for one thing I noted. This individual had a category as follows:
Credit Card Payment (minimum)
This shocked me for a number of reasons. First and foremost, the minimum part that was included. Secondly, paying off your credit cards is not an expense. For example, if you go to the grocery store and spend $50.00 on groceries but apply the charge to your credit card, then your budget should reflect a $50.00 purchase on groceries. The credit card is simply a means to pay for it. Finally, I recognized that this individual had credit card debt, and he assumed paying off in minimum installments would eliminate it. Yes, theoretically, as long as no further debt was incurred, but it would take a while.
This ultimately led me to the following conclusion. This individual had a significant amount of money remaining in their budget every month. I advised him that if I was in his situation I would do the following:
- Make sure I am able to cover all of my necessary expenses in the budget. This would include rent, gas, food, student loans, etc.
- See where some expenses can be cut. Bringing his lunch to work versus going out to eat might be the smartest financial decision until he gets his credit card debt under control.
- Use any extra money at the end of the month to pay off the remaining balance on the credit card. Credit cards are notorious for having extremely high-interest rates. The quicker you tackle this type of debt, the more you save.
- Set a goal for paying off the credit card debt. We agreed by the end of the calendar year. Once the debt is paid off we could redo the budget and include categories for savings, retirement, and other financial goals.
Credit card debt can be a nasty thing, but a budgeting approach to handling it can make your financial life much better. Use a budget to pay off your debt if you have any, then you will be able to create additional space to begin planning for your financial future more aggressively.
Budget Smart, Invest Wise
A Spooky Statistic
As we inch ever closer to another Halloween evening there is a spooky statistic that I recently read about. Business Insider recently published an article that today’s college graduate can expect to retire at age 75. Yes, age 75, which was coincidentally the average life span of an American just 24 years ago.
Why age 75?
High student debt, rising rents, and social security viability are just a few of the reasons.
The average student loan debt sits just above $35,000. As someone who graduated a mere 3.5 years ago who had just over $30,000, I can attest that a large portion of one’s income goes to paying down that debt. And when you use the majority of your income to pay down debt what does that do? Prevents one from saving for retirement. Prevents one from saving to buy a house, thus subjecting oneself to the ever-increasing rents throughout the country.
By the time today’s graduating seniors look to retire, life expectancy could very easily be well into the ’90s. Fifteen or so years of retirement might seem like a plausible plan for many. There are ways to ensure that you don’t have to wait until 75 for retirement though. It starts with budgeting, followed by saving and paying down debt. Finally, it is followed up with living within your means and not succumbing to societal pressures to purchase all of the nice things.
Don’t be a part of the spooky statistic.
Budget Smart, Invest Wise
Video Series: Eye Opening World of Personal Finance
Today’s video is one that is almost two years old; however, the facts provided and insights suggested are timeless. I honestly believe that the majority of people who follow my blog are in a better financial position than 90% of people throughout the world. It is mind boggling to see how some do struggle. We get caught up in a spend spend spend trend that we forget how important it is to save save save. Maybe you know someone who isn’t in as good of a financial position as yourself. Help teach them responsible personal finance and don’t let him or her become another statistic.
Budget Smart, Invest Wise
Establishing Good Credit
Growing up I was told by my parents, “With good credit, you can afford anything”. That was then, and this is now. We all saw what happened with the housing bubble and what will soon probably happen with student loans. Credit is important, but not meant to purchase things above your means.
Having good credit is important; however, using that credit isn’t always wise. I saw an info commercial the other day for a product that cost $250. They were offering people 12 months of interest free financing. If you have to finance $250 for a 12-month period then you already have money issues and shouldn’t be buying it in the first place.
A friend of mine had an old Ford Expedition with a couple hundred thousand miles on it. He bought it for around two grand, drove it for 12 months, and then it broke down. Either he didn’t have another two grand lying around to purchase another piece of junk, or he wanted something a little more reliable. Either way, he decided to purchase a used one for around ten grand this time. He didn’t have enough money to purchase the car, so he needed financing for the purchase. Problem was, he had no credit. He was offered an interest rate of 13% for a car loan that was over 36 months. An absolute ridiculous rate. He ended up getting his mother to cosign on the loan and got it for 1.9%, very good and reasonable.
Moral of the story… You never know when you need credit. It is important to have it established for that rare chance that you do need it. Young people are notorious for abusing credit cards. They spend and spend, and I can only assume they are disillusioned that they never have to pay.
Those individuals who have a good mindset around money should consider establishing credit in one way or another. Establishing credit by signing up for a credit card is fairly easy. Proceed with caution. I would only recommend that someone get a credit card if he or she has income (don’t be a college student without a part-time job at the very least). If you don’t have any credit then start with a well-known card such as through Capital One or Chase. Charge a tank of gas on the card every month. Circle the date when the amount will be due every month and pay off the balance.
Showing responsibility early on when it comes to credit cards will not only keep you away from high-interest debt, but it will also allow you to avoid a 13% or higher auto loan if and when you might need it.