Credit Questions Everyone Should Know

Everyone hears about the terms credit, credit report, and credit score most of the time, but few know exactly what they really are. 

What is Your Credit Report?

Your credit report is a file that lists down your credit history, from the moment you first obtained credit to your current credit standing. It contains all information related to your debts, such as outstanding balances in your loan and credit accounts, types of accounts that you have closed or have kept active, your credit limits in each account, and your payment histories. Your credit report also lists down public records against you, such as bankruptcies, repossessions, foreclosures, tax liens, and judgments.

What is Your Credit Score?

Your credit score is a three-digit number that pretty much rates how good or bad a borrower you are. It is calculated based on how timely you are with your payments, how you keep your balances below your credit limit, the mix of credits that you have, and your average age of credit.

Why is Credit Important?

Your credit is important because it affects your ability to borrow money. The higher your credit score, the better your chances of getting approved in every loan or credit application. However, even if you don’t intend to borrow money, there are other aspects in life wherein you can see the importance of credit.

First, not only is your credit necessary if you’re trying to apply for a mortgage loan, but it is vital even if you’re just renting an apartment. Many business owners, including landlords, would like to determine if you habitually make payments on time, and they will pull out your credit report in order to see that.

Second, credit also affects your ability to apply for utility or mobile phone services, for the same reason that these companies like customers who pay diligently. If you have bad credit, it would be hard to get approved for these services without shelling out a security deposit.

Lastly, good credit can help you find better employment or achieve your well-deserved promotion. Nowadays, credentials alone aren’t enough. Most employers are cautious when a person has bad credit because it might reflect financial distress and irresponsibility.

How Soon Should a Person Start Building Credit?

Ideally, the best time to start obtaining credit is during college or as soon as the person reaches legal age. This can help establish financial discipline early on. While people in this age group might be the most risky borrowers, they are also the ones who can become financially successful sooner if guided and taught properly.

What You can Do to Protect Your Credit?

While obtaining credit alone is challenging already, maintaining it requires extra effort. To start with, make sure to always pay your bills on time. Keep constant watch of your balances and as much as possible pay off every balance in full. Keep your old accounts active and maintain a good mix of revolving and installment accounts. Additionally, you should protect yourself from identity theft, which can ruin your credit and everything you’ve worked for overnight.

Best Financial Tips for Newly Grads

As a new young adult ready to face the real-world, you should be prepared for what lies ahead. These financial tips can help you go through the many challenges that you would face right after college. 

Think like a student. Most newly grads get excited about getting out of college, having a full-time job, and earning a decent salary for themselves. Unfortunately, this may give way to a totally new lifestyle, wherein they mostly get trapped in unnecessary spending.

In order to avoid this, you should try to spend like you’re still a student, wherein you’re living on a limited budget, keeping up with an older car for too long, and cooking your own meals instead of dining out. If you choose to forget that you have more income now and stick to your old spending habits, you can pay off your debts, if you have any, more quickly and begin planning for bigger goals.

Contribute towards retirement accounts. Make sure that a retirement account will be arranged at your new workplace for you to take advantage of employer-matched contributions. That’s free money put towards your retirement so be sure to maximize your contributions.

Keep your credit in check. At any stage in life, you don’t want to mess up your credit, unless you want to jeopardize your ability to borrow, buy a car, buy a home, or even get a job. If you’ve had a credit card while in college, it would probably be easier to obtain additional credit now compared to starting from scratch. Just make sure you watch out your spending, pay your dues on time, and keep your oldest credit cards active.

Get rid of highest interest rate debt first. Many newly grads do not only have student loans to pay for, but credit card debt as well. While it could be tempting to get rid of your student loan first, it might be wiser to focus on reducing your credit card balances, which carry higher interest rates that can cripple you for a long time.

 Prepare for unexpected dangers. You can never tell if anything happens to you, if you’ll get sick or get fired. What’s worse, you’re starting to live independently now and you can’t just expect your parents to bail you out. If you got ill or lost your job, the bills would still come, and if you have no source of income, you have to resort to borrowing in order to pay for them. To avoid accumulating unwanted debt, better build up your emergency fund so you’ll be able to make ends meet without resorting to debt.

Create a budget and commit to it. It’s hard to plan on pulling away from debt and preparing for a brighter future if you do not have a budget to follow. When creating a budget, it is important that you look closely at your income and expenses, and assess which areas you can cut costs. More importantly, you should set a realistic budget that you can follow through the long-term.

Financial Planning in Your 20’s

Not many people in their 20’shave gained financial discipline and maturity. Although it might seem that you are still too young to worry about bigger responsibilities in the future, planning early can keep you well ahead in the game. 

Save a Little

Saving at this stage may be too early in the mindset of most in their 20’s. Particularly if you just got off from college, you might think that you’d rather have fun than worry about distant life changes such as retirement, and saving could ruin your enjoyment plans for today, right? On the contrary, building the habit of saving as early as now can help you become financially free sooner. If you dream about retiring early one day, one of the things you should learn first is the habit of saving. It doesn’t have to be that huge, what’s important is that you get started. Even if you just save 10% of your salary today, you’d have more funds in the future compared to if you started saving 20% 10 years later.

Live Within Your Means

Again, it’s hard not to spend every paycheck on things that you weren’t able to buy while you were a student. But earning your own income doesn’t necessarily give you much financial advantage. In fact, there are more obligations that you have to worry now. If paying for your car or rent will put you into financial distress, consider moving back in with your parents. It may not sound independent and obviously contradicting to your views as a young adult, but it can save you a lot while you’re yet to stand up on your own feet.

Start To Pull Away from Debt

If you have student loans left, it is always best to prioritize getting rid of this in order to focus on other goals sooner. It’s hard to save up for a home or get married if there are huge responsibilities left behind, so it’s best that part of your saving plan would be allotted towards debt reduction.

Build Your Emergency Fund

Before any major endeavor, you should put money into your rainy-day fund. Illness, accident, or job loss doesn’t typically occur to people in this age group, but you have to remember the fact that you are not invincible. A three to six months worth of emergency fund can give you safety net during these unforeseen disasters and can save you from impending financial doom.

Diversify Your Portfolio

Kudos if you’ve been able to stick to your saving plan, but saving alone will not give you the best returns on your money. You can go a long way with little experiments on low-risk and high-risk investments which can provide you extra funds which are impossible to earn in a regular savings or time deposit.

Start Working on Long-Term Goals

Though starting your own family or buying a home may be far away, it’s smart to visualize it as early as possible. If you figure your goals earlier, you can come up with a financial plan that is aimed to reaching those goals soon.