Updated: Jan 12, 2020
There are so many reasons why credit is important and understanding how important credit can be to your own life is most important. When you turn 18 and get your first car, first credit card, first apartment, get a loan, or anything else where credit is important such as college loans, your credit file starts building. In some cases, this can technically start even sooner such as when your 16 years old and added on as an authorize user. We will discuss this topic another day but for now let's stay on topic.
The American society is designed to depend heavily on credit. That' show the government is able to leverage so many things in our lives. If you don't believe me, just look back at 2008 -2009. This of course is not the only time in history where the credit system reared its ugly head and it won;t be the last. So, understanding the important how to securely manage and leverage credit to your benefit is going to be key as the American society goes through another eventual reset, down-turn, hyper inflation or what ever you want to call it, it all comes back to he same common denominator... Credit.
America is quickly becoming a cashless society not in totality but heavily so. If you owe more than you own or if you are living paycheck to paycheck and credit card to credit card all at the same time, this is a toxic brew for eventual failure. With that said, lets go over some things that can help you mitigate your risk and get the most out of your credit profile. When you are just tarting out and building your credit file, you have many decisions to make and many things to learn. Experience and time can be your greatest allies if you can exercise some restraint through patience. These to together can help you by learning to live below your means.
If you can't afford it, don't buy it. Another way of saying it is, if you don't have the equivalent cash on hand in savings or some other reserves, it is best not to make the purchase. Buying a new car for example, if you can identify the car you want, calculate your estimated payments in advance based on your credit, and have a significant payment of at least $2000 or more, then you put yourself in a position to have a lower monthly payment, you pay less interest over time, and depending on how Strong your credit profile is, you can even have a lower interest rate with better loan terms.
Buying a home can be taxing and time consuming process for most people much less taking on the new monthly expenses which causes many people to have more of e squeeze in their monthly expenses causing them to live paycheck to paycheck. If you do not have the 20 percent down for the mortgage, you monthly payment can easily go from $1500 to $1850 per month do to the PMI fee to help mitigate the increased risk to the lender to ensure if you have a loss of income and are foreclosed on, that they will still get their money and recompense for having to now process the how and put it back on the market to resale to someone else. Instead of paying less, you end up paying more since you are considered more of a liability in this case.
For those who have the funds and have excellent credit above 720, they have better loan terms and loan options that are available to them that could potentially help with covering the cost of the 20 percent down without even coming out of pocket for the extra cost and you guessed it, not have the pay the PMI insurance. As result, while you are paying $1850 per month for your mortgage, the neighbor next door is paying $1500 a month and able to put the rest towards their savings, vacation, etc.
There are of course many other factors that can and do come into play. This is why it is so important you are managing your credit without over doing it before you are able to handle more. Take gradual steps in the credit building process. Continue learning and visiting website like annualcreditreport.com where you can setup an account and request your free credit report with all three bureaus, Experian, Equifax, and TransUnion.
You can request a detailed hard copy in the mail which could take 2 weeks or more to receive which is worth it or you can view a summary credit report online with each bureau. These are some goods ways to review the feedback and tips they give on how to improve and maintain good credit. One way of doing this as well is by applying for some starter cards such as a Capital One Platinum Card which is actually a very good starter card and typically much easier to qualify for when repairing or establish credit for the first time.
Read your credit card statements carefully and only use the car for small purchases such as gas, coffee, lunch or something else that is not a big purchase. Plus, you only have a limited starting credit line anyway of either $300 or $500 dollars in most cases. Another thing to with the Capital One Platinum Credit Card is that it reports to all 3 credit bureaus and after 5months, they give you an automatic credit limit increase based on onetime payments. Other Starter Credit cards are the Petal Card, Discover It (Student and Non-Student) and then there are some other Secured credit cards where essentially,you put a deposit down, maintain good payments history for the next 9-12 months and then you will get your deposit back minus any applicable annual fees, and then be upgraded to a regular credit card with an increased credit limit.
Lastly, credit is used to not only purchased cars and homes at certain rates and terms, but also to qualify you or deny for renting an apartment, condo, or home. Many times people are denied and have not been told why which base on the fair Credit Reporting Act, they have a right to request a free copy of their credit report to see what is showing on their credit report as the the reason for denial. Some of the biggest reasons can be scores in the low 500's , vehicle repossessions, and previous evictions. It is best to find out what is your credit scores are prior to applying for certain loans or applying to get into an apartment so that you do not have your credit dinged and lowered because you keep having it pulled each to you go somewhere else. To make it even worse, many people I talk to don't even realize it and they are being charged a fee for being told information they could have found out for free on their own.
These are some of the reasons why it is so important to never underestimate the value of credit and the impact it can have on every are of your life. The better educated you are and understand how credit can be used for good, you can better equipped yourself for when it's time to make those major life purchases.