Credit Management
This is another article that we hope you will pass along to a young person you may know. If it helps them, we both did our good deeds for the day.
Lenders will often use your FICO score in making loan decisions. This can affect if you receive a loan or in setting the interest rate they will charge on a loan. FICO is an algorithm that uses information from credit reporting agencies to assign a score. The higher the score the greater likelihood the lender will be repaid in a timely manner. It considers Amounts Owed 30%, Payment History 35%, New Credit 10%, Length of Credit History 15%, and Credit Mix 10%.
Each can positively or negatively impact your score over time.
Assume you get your first job and open several credit cards. New credit can negatively impact your score. Over time you pay your bills on time. This will positively impact your score. Having the available credit maxed out would be a negative. Really what it is attempting to measure is do you have a history of managing your credit responsibly? If so, there is a greater probability you will use credit responsibility and repay the new debt in the future.
The problem is there are a lot of myths that can lead young people to make poor decisions. “I’m buying a more expensive car than I can afford, but it will build my credit score so that I can buy a house.” Only if you make the payments on time and are at the end of the loan repayment. “I got a preapproved card in the mail. I should party!” Not sure I can refute this logic. “My credit card provides unlimited cash since it is not taken directly out of my bank account.” I give up.
When considering a loan or credit card, every offer is not the same. Shop around first. Check for annual fees, interest rates, cash back rewards, etc. Establish good habits at a young age. This will lead to a better credit score and greater financial opportunities over time. If you use a credit card to purchase consumables such as gas or food, pay off the balance each month.
If you have questions, please contact the Dent Moses team.