|Which one are you?
Usually, I’m not one to throw the race card out there. But I’m sure most African American people can agree that building financial security is NOT a priority amongst the list of things we are taught growing up. I’m 20 years old and I’m just now learning the importance of credit, how to manage a credit card & monitor my credit score.
I got my first taste of the importance of credit a couple of months ago. I had just obtained my driver’s license and I just knew I was going to be rolling around in a brand new 2012 Nissan Alitma, equipped with leather seats, power windows and all that other good jazz. I even test drove the car! Boy was I excited. The salesman ran my credit & said “you have no credit.” I was devastated. As far as I knew I was a good as gold. From that experience I’ve learned a lot about credit and how to maintain credit. So I’ve decide to share my knowledge with you all. First, I’m just going to assume that everyone is just as naïve about credit as I was (and still am) and go over the basics. Let’s talk about different types of credit.
Secured Credit: usually a line of a credit that has to be secured by an asset. For example a car, house, or money. For instance Wells Fargo has a secured credit card that they offer that requires you to put down a minimum of $300 to obtain credit. This option is usually for people looking to build/repair credit.
Unsecured Credit: the most common type of credit, a line of credit that does not require a down payment or collateral of any sort.
Non-Revolving Credit: also known as “payment plans” or “installment agreements” these lines of credit require you to pay a fixed amount monthly until the debt (or principal) is paid in full. I’m sure we’re all familiar with Sallie Mae student loans, that’s perfect example of this
Revolving Credit: this sort of credit does not require a fixed payment each month, it varies based on how much credit is used vs. how much money you pay off. Credit cards are a good example of this type of credit.
Short Term Loans: these are also known as “payday loans” this sort of credit is VERY expensive and should be used for EMERGENCY USE ONLY. The interest rates are through the roof and most financial advisers warn that it could easily lead to a cycle of debt.
Now I don’t want to bore you all with this terminology so we’ll take a break and get back to the interesting dialogue. These are the types of things I feel should be instilled in the household at a young age. I’m a bit frustrated that I’m just now learning the importance of credit. Instead of putting bills in our kids names and using their social security numbers for light bills and such. We should be teaching kids what it means to pay bills on time, to make monthly payments, how to balance your debt-to-income ratio, how to build credit and how it applies in the real world. For instance, having good credit (a score of 600 or more) makes borrowing money easier. You have access to low interest rates, lower monthly payments. Also, more companies are using credit checks as apart of the hiring process. Especially financial institutions (such as banks) where employees will have access to people’s finances and financial information on a regular basis. I work for a phone company and they ran a credit check on me.
There a few terms you’ll need to familiarize yourself with regarding credit.
APR: stands for Annual Percentage Rate in the credit card industry means the amount of interest a cardholder will have to pay annually in addition to other fees incurred by the user.
Fixed Rate: an annual percentage rate that does not change
Guarantor: person responsible for paying a bill
Liability Amount: an amount of money which you are legally obligated [to pay] a creditor
Service Credit: agreements with service providers. A person receives goods, such as electricity, and services, such as health club memberships and apartment rentals, with the agreement that you will pay for the goods/services each month.
Third-Party Collectors: collectors who are under contract to collect debts for a credit department or a credit company; a collection agency
Trade-line: entry of data by a creditor to a consumer’s credit history. A trade-line describes a consumer’s account status and activity Trade-line information includes names of companies where the applicant has accounts, dates accounts were opened, credit limits, types of accounts, balances owed and payment histories. Basically it’s a fancy and very detailed credit report.
If you’re new to this credit thing (like myself) the easiest way to build your credit is to open a secured credit card, which we talked about earlier, to establish or repair credit history. Most major banks and even credit unions offer this kind of credit card to their customers. Department store cards such as Macy’s, TJ Maxx, or Target also offer credit cards for customers as well. Most banks offer credit cards for college students with low interest rates and are usually easy to get approved for.
On time payments are key, even if you are paying the minimum balance on a credit card, be sure to pay AT LEAST $1 more than the minimum balance due. For example if the minimum balance due on your credit card is $55.57 pay $56.57 it shows you’re wiling to go the extra mile to pay your debts. That’s a little trick I learned from an experienced banker at Wells Fargo. Always make arrangements to pay your debts if you cannot pay them in full. It prevents companies from reporting your debts to any of the major credit reporting companies (TransUnion, Equifax, or Experian) most companies are very flexible with payment plans (or installment agreements if you want to get technical). Having good credits reflects positively on each individual. It shows you are responsible with money and a trustworthy individual. Start small, don’t overwhelm yourself with big purchases that you can’t pay back in a timely manner. Be responsible, and spend money wisely. Until next time.