Your Credit Score

Think of your credit score as your financial GPA. Every bill you pay on time is like an A, every missed payment is like an F, and just like school, your average matters when it comes to future opportunities.

Credit & Debt Management

              A credit score is simply a three-digit number between 300 and 850 that predicts the plausibility of you paying back a loan on time. Credit scores are calculated by looking at your financial history, aka your credit report. Your credit report is information on your credit accounts (for example credit cards, loans, mortgage), payment history on any past or outstanding debts, and public records on documents like taxes or bankruptcy history. This is compiled by a credit reporting agency then run through a scoring model (see figure 1 for breakdown) that uses the details on the credit report to create an overall score to quantify the security and reliability of your finances. Lenders like banks and auto dealers then use this score to determine whether they want to take the risk of you defaulting (failing to pay) on a loan and set the conditions like interest rate and payback period if they decide you would be low-risk and profitable. Credit scores are what provide or restrict access to essential financial products like loans or credit cards, with a higher credit score signaling a responsible borrower, inducing better terms. The average credit score in the U.S is approximately 715, with a score of 670 and above being considered good, and anything below 580 being considered poor.

Figure 1 (https://medium.com/)

Credit Cards

Credit cards allow you to borrow money from an institution to make purchases with credit. You must repay all the money spent plus interest and potentially fees. Credit cards are revolving payments, meaning you can borrow and spend money over and over up to a set limit which is agreed upon with the financial institution (often credit scores are referred to in this consideration). Having a credit card may seem like infinite money but making purchases out of your realistic financial range can cripple you financially.

When you spend on a credit card you will have a credit card balance which is the total amount you owe. Every month there will be a billing cycle, and at the end you will receive a summary statement of activity, money you owe, and payments required. A safe practice is to review your credit card statement in case of fraud where purchases are being made on your card that isn’t from you, and it helps track your spending to help manage your budget.

Avoiding debt traps and making responsible credit card payment decisions will help you stay on track to financial success. The initial negotiations in credit card acquisition will determine your credit limit and interest rate. People with higher credit scores will often be able to get higher spending limits and lower interest rates because they are more likely to pay back their loans and not default. Interest rates and fees are a bank's way of not only making money but lowering their impact of a borrowers default. Make sure to compare rates between credit card institutions and try to find a credit card with a reasonable limit and a low interest rate with low fees, as interest rates have risen significantly in recent years (see figure 2). Once you have the card, good practice is to pay the outstanding balance in full every month if you can to avoid incurring too much debt, but if you can’t at least pay the minimum to avoid incurring fees. Try to keep credit utilization low, so spend less than 30% of your credit maximum to keep your credit score high. Make sure you also pay on time every time so as to not pay late fees. Finally, keep your card secure and don’t open too many cards as that will decrease your credit score if you have balances on many of them.

Figure 2 (fred.stlouisfed.org)

Credit might seem complicated now, but it’s really just about making consistent, smart choices. Start small, stay disciplined, and you’ll thank yourself later when those good habits pay off big time.