Credit 101: Where Do I Even Start?
By Jessica Galvan, FSR
As a financial services representative at Meriwest, some of the most common situations that I find people need help with are credit issues. Where does someone start? Why is good credit important to have? What does 'credit' even mean?
Because the concept of credit - especially the basics of it - is important to understand, here is a little Credit 101 on what credit is, why it’s practically necessary to have, and some tips on how you can start establishing good credit.
What is credit?
Credit comes from the word credibility, which is the ability for a lender to rely on you for financial reasons. It is a contractual agreement in which a borrower (that’s you!) receives something of value now and agrees to repay at a later date.
When you make a purchase with a credit card, you are buying on credit because you are receiving the item at the time and paying back the credit card company on a monthly basis. A credit report will tell a potential lender if you are reliable to receive a loan based on your previous relationships with other lenders and how you've paid them.
Why is credit important to have?
Whenever I have the opportunity to visit classrooms and teach students about credit, there is at least one person in every workshop who asks this question: Can’t I just pay everything with cash instead of using credit?
If you have the ability to pay with cash every time you purchase something, that’s great. However, there are certain things you might want to consider, such as the fact that you might need a loan for a house or a car in the future. The average cost of a house in the Bay Area is $800,000, so sometimes a home loan - for which you'll need good credit to be approved - is necessary.
The reality is that we live in a credit-based world. Many employers consider credit when evaluating job candidates. Utility companies, some cell phone companies, and insurance companies are a few of the services that require credit checks. Apartment applications also tend to run credit checks to evaluate if someone will pay rent on time. If you have no credit, you sometimes have to pay a higher deposit or worse – you’re automatically declined.
How do I start building credit?
Your first credit check can start with opening a checking account. This is often the first time your credit report is established. It is important to maintain your checking account by making sure to deposit money regularly and balancing your spending. Avoid having a negative account by overdrawing. It’s also very important to pay each bill before the due date!
Keeping your checking account in good standing is the first important task in building your credit. After all, if you can't maintain your own money in your own account, do you think you'll be able to manage someone else's money? Likewise, if you can't (or simply don't) pay your bills on time, do you think someone will want to lend you money?
Remember that building your credit is a slow and steady process. Don't immediately open a lot of unnecessary accounts, especially when you're unaware of the different costs or rules for each card.
A lot of companies offer first-time buyer programs, which are a great way to start credit - just watch for high rates and fees and be knowledgeable about what exactly is being offered to you. After all, establishing credit is about making good and well-informed financial decisions!
As mentioned above, credit is a very big and important concept. There are many other specific and varied questions and situations people have. For more information and personal advice, please feel free to contact us and talk to a financial service representative.
We also have a FREE Improving Your Credit Score Seminar at our Chesbro Financial Center (5615 Chesbro Ave., San Jose) tomorrow - Thursday, August 13, at 6 p.m. Everyone is welcome to attend!