Building Credit

Blurb:

Have you ever wondered why lenders trust you with money? Or how they are confident they will get that money back? Well, they rely on something called credit. Credit is an integral part of an individual's life so it is important to learn how to accumulate credit from a young age. Continue reading to learn about credit and how it can benefit you. 

What is Credit?

Credit provides an individual with the ability to borrow or access goods on the basis that they will reimburse the lender at a later time. In more simple terms, credit is a means of holding a person accountable during a transaction that is built on trust. This is documented in a credit history. A credit history is a record of how diligently an individual pays back loans. Some factors included in a credit history are whether you pay back your loans on time, whether you missed a loan, and how much was owed. Some ways you can build credit are through: credit cards, student loans, mortgage, etc. 

A key point to remember is that if you have no credit history then either you cannot get loans/credit cards, it will be really difficult to find someone who will loan you money, or your loan will come with high interest rates. That's why it is important to build credit fast and more importantly have a good credit history. 

So, what is a good credit history?

In simple terms, a good credit history encompasses paying your bills on time and not carrying around a huge amount of debt. It is essentially poof that will assure your lender that you will pay back your loans on time. However, having a bad credit history could turn potential lenders away since they have no guarantee that you will reimburse them. That is why it is crucial to accumulate a good credit history since it will benefit you in the future and make it easier to acquire a loan. 

Let’s take a look at an example. The most common and widespread way to accumulate credit history is through credit cards. When you own a credit card you are provided with money from the bank that owns the credit card. The bank supplies you with money to spend based on trust that you will return that money to them at a later date. They trust you with their money based on your previous credit history, and that is why they can charge higher interest rates if your credit history is not as developed or reliable. Then depending on how responsible you are in paying the money back, it will affect whether future lenders will trust you. 

How does this apply to young cardholders?

Young card holders typically have little to no credit and if you remember from before, this means it will be difficult to acquire a loan and if you do manage to do so, you will be charged high interest rates. Once you turn 18 you can qualify for your own credit card or loan but failing to be diligent in returning your money can have major repercussions such as:

• Higher interest rates

• Fewer loan options 

  • Which means harder to make larger purchases 

• Harder to find housing 

• Might even affect job hunt 

So remember, it is crucial to start building a positive repertoire with banks from a young age, whether it be to get rid of high interest rates or to start enjoying the benefits of being an adult. 

Shocking statistics: 

• Nearly 30% of Americans owe more in credit card debt than they have in emergency savings.

• The average US household has $14,241 in credit card debt.

• The total American credit card debt is $800 billion.

• The average American owes $5,525 in debt