Would you rather pay $262 per month or $380 for the exact same thing? Establishing a strong credit profile will help you save money over your lifetime, especially on big ticket purchases: cars and homes. While buying a home and having a mortgage may seem far away, most young adults will need basic transport. Maybe you're looking to buy your first car. You're reasonable (you're not at the Bentley dealer), responsible (at least for the most part), have a good job (well, you have a job), and every intention of paying back the loan. That $15,000 auto loan can cost you as little as $262 per month or as much as $380. Same car, same color, same options, the only difference being the first loan example is for a "good" credit at 1.9% interest, compared to the second at 17.9% interest. Over the course of a 60-month loan, it can equate to more than a $7,000 difference in the amount of total interest paid ($736 vs. $7,805), or nearly half of what you paid for the car.
What does it take to be a person with "good" credit? First, you need to have credit to have "good" credit, so you'll need to get credit of some kind. When choosing a credit product, find one that fits your lifestyle and spending needs and will benefit you. Different products have different incentives, and finding the one that provides you with the greatest benefit will be a function of how you're going to use it. There are lots of credit grantors, and each provides different incentives for using their products. Credit cards branded by a particular retailer often offer special discounts, rewards, or points you can accumulate to apply to future purchases. This may be a good fit if you shop often, buy fuel for your car or make everyday purchases at a favorite retailer.
Likewise, some creditors offer special financing, such as a deferred interest option, which requires minimum monthly payments and enables you to not pay accrued interest on your purchase if you pay off the balance in full within the specified timeframe and before the promotional end date. Even if you don't have a mortgage yet, you may need to make a major purchase such as furniture, electronics, bedding or appliances for your current home or apartment.
There are costs to credit as well. Make sure to read the details and disclosures. Are there annual fees? And if so, do the benefits or rewards offset those costs? Likewise, don't just think about what may be an attractive sign-up offer. Are there advantages after the first sale, such as special discounts on subsequent purchases, exclusive sales, or cardmember-only benefits?
When you do add a new credit card to your wallet, review every billing statement carefully to ensure you are certain of when a payment is due, how much the minimum monthly payment amount is, and when you need to have the entire balance paid off in full to take advantage of any promotional, deferred interest offer. It is important to remember if there is a deferred interest period, making only the minimum payment may not pay the balance in full within the promotional period. This is where mobile and online account management functions can be important features to consider to access your account when and where you need to, including looking up account information, making a payment, or redeeming those earned rewards.
So, now you have a new credit card in your wallet. If you plan on having another one at some point, and to be considered a "good" credit, you must MAKE YOUR PAYMENTS ON TIME. Approximately one-third of your credit profile is associated with how well you have historically paid your existing accounts. Would you lend money to a friend who consistently doesn't pay you back? Neither will creditors. Even if you don't pay off the balance in full, you need to make at least the minimum payment when due.
Approximately another third of your credit profile is associated with how you use your accounts. Responsible credit usage will help you build a stronger credit profile. While many times you're applying for credit because you need it to buy something, it can affect your credit score in the short term if you stay "maxed out." Credit scores can be impacted if you use all the credit line(s) you have available, so don't spend the full limit of your new credit card just because you have it. Your borrowing should fit your monthly budget, with payments that are realistic for you and enable you to pay down your balances over time. In addition to budgeting for your spending, also budget for what you should save. The last third of your credit profile is based on the length of your credit history, types of credit you have and use, and whether or not you are taking on more debt.
Your credit score will fluctuate over time, but paying your bills on time, being responsible with your debts, and sensibly managing your budget can help you pay less for things you need and want in the long run.
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