Credit is a very important element of your financial well being. Credit affects just about every aspect of your life. For Low income recipients, it single-handedly determines whether or not you will be able to participate in the so called “American Dream”. What does this mean? If you have low income, more than likely you have NO way of outright buying the things you want with cash. These are things such as cars, elaborate clothes, household items, and the most wanted of all, a house. This is why credit exists. Never disregard the impact that your credit score can have on your future.
What is Credit?
Credit is your rated reliability from financial institutions based on your ability to pay back what is borrowed with what you have not yet earned.
Why is it important?
Credit is used to start businesses and acquire personal items such as apparel, appliances, services, automobiles, and last but not least real estate.
Where Do I start building my Credit?
In order to get a hold on your credit, you have to know how it works. First thing’s first, obtain a credit card. This credit card will act as a building block for you to establish credit stability. What kind of Credit Card? Could you get any type of credit card? No. The worst type of credit card you can get is from your favorite department store or a store specific card. Because it is store specific, you are more likely to grab MORE of what you love and more than what you could normally pay for. You’ll put it on credit and walk out of the store forgetting about the bill. This will become a cycle because the store has most of the things you already want causing you to spend impulsively.
Instead you should get a general credit card from one of the credit card giants like Capital One, Chase, Discover, or Citi. With this first card, your interest rate will undoubtedly be high. Typically, a Credit Card should run you anywhere from 13-24% interest. This first card will be near 24%, but that’s okay because you won’t be using the card strenuously anyhow. These card come with minimums of $25. Never pay the minimum because it will not stop the rate of growth of the interest . For example : 25% interest of a $200 balance is $50. If you only pay the $25 minimum, Each month your debt will increase by at least $25. In general, pay for about 75% of what you spent in the month if you cannot pay your bill in full!
Automobile Credit
Car credit is like a catch 22. Having an auto loan boosts your credit score in terms of credibility however when buying a home, it is harmful for your Debt to Income ratio. Here’s what Debt to Income means: the bank counts up all of your monthly expenses/obligations to see if you can handle a mortgage payment on top of what your paying. These days, if your debt represents over 50% of your income, you wont qualify for a mortgage.
Here’s an example of how Banks determine DTI: Mortgage $500 +Car Payment $500= $1000 debt. Imagine your income is $2000. $1000 in debt divided by $2000 income= 50%…You would qualify for an FHA Mortgage. Quick advice, buy a home first, not the car. Mortgage lenders care if you are committed to a contract of an automobile loan. Auto loan lenders are not too concerned with debt-to-income. For specific instructions on buying a new car and getting the best payment, Read this: Buying A New Car… Successfully!! Next, Lets talk about student loans.
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Student Loans
Contrary to what is advertised… student loans, in no shape or form is good for your credit. Like Auto loans, they only help your score with the fact that it is proof of having credit with an entity. When student loans are deferred, creditors report that your payment was received on time and that you’re in good standing. However, during this entire time interest is accruing. So this is why the student loan companies do not mind when you defer your loan. Even when you are on a income-based repayment plan and your payment is $0; interest is accruing. Never go along with paying $0. It’s a trap! Remember the Debt to Income Ratio? Here’s why most millennials are still renting or “live in mother’s basement”.
Student Loan Debt is included in the Debt to Income ratio. The average student today graduates with $40K in student loan debt accrued. By law, unless you have a fixed payment, the banks take 1% of your student loan total and considers that as your obligated payment. 1% of 40,000= 400. So consider the situation in the previous paragraph on auto loans. Mortgage $500+ Car Payment $500+ Student Loans $400= $1400 divided by your monthly income of $2000. Your debt now represents 70% of your income. You no longer qualify for a mortgage.
As your loan is in a $0 repayment plan, your debt grows. Thus making it almost impossible for you to overcome that ratio without having a major promotion or increase in income. You MUST pay this debt down if you ever want a chance at a stable financial outlook. Fresh out of college, Look to make your first student loan payment rather than a car payment.
Bad Debt… Start Disputing!
Use free credit websites such as Credit Karma to monitor your score during the rebuilding process. Look at all accounts negatively affecting your score. If any items are verrrry old … dispute them right then and there on the site. Each crediting company has a time frame in which they must respond to your request. If they don’t, they have to automatically remove the item from your report. In all reality, you can keep doing this until all items are removed. Minimize paying for unhealthy habits (like cable) and focus on paying items restricting your credit score.
Conclusion
I never advocate for systems designed to trap you, but I always encourage my investors to use those systems that were designed to constrict us as a foot stool. Use credit as a tool to get what you want! Credit begets credit. Meaning, as your credit score improves… everyone offers you more credit. There are larger credits such as personal loans and home equity loans which can be used as collateral to obtain other investments. You just have to learn to manage it responsibly. The goal overall is to convert credit into CASH. Your credit IS important. You have to take it seriously.
