Your credit score can open or close many financial doors. If you have a good (or great) credit score, those doors can open, and securing a new credit card or financing for a new car or home can be a breeze. If you have not so good credit, some of those financial doors may be harder to open. The two most important factors that make up your credit score are payment history (i.e., are you making your payments on time and in full) and amounts owed (i.e., do you have so much debt that you're unable to pay it off).
During this time of uncertainty, your job security or income stream may be impacted, which is why it's so important to maintain those good financial habits, such as paying bills off on time, so that your credit score isn't negatively affected. If you are struggling or worried about the future, here are some good habits to put into place now:
- Try to pay at least the minimum amount due on time. Your credit score is less impacted when you make minimum payments than if you make no payments at all.
- Before you miss a payment, reach out to your credit card issuer or lender for assistance. Some credit card companies and lenders are offering personalized solutions during Covid 19 that aren't widely discussed or advertised.
- Get a free copy of your credit report and review it regularly. Equifax, Experian, and TransUnion are offering free weekly credit reports for the next year.
- If you can, add more funds to your emergency fund or start building one now.
- If your cash flow is not immediately impacted, start making extra payments on your existing debt. Make sure you have an adequate emergency fund before you do this.
And if you need a primer or refresher on credit, keep on reading below.
What exactly is consumer credit? Consumer credit (aka consumer debt) allows you to purchase something today that you don’t pay for until later. There are 2 types of credit: installment and revolving.
| Installment Credit | Revolving Credit |
Uses | A loan for a fixed amount of money, where the borrower agrees to make monthly principal and interest payments within a defined timeframe (e.g., 30-yr mortgage, 60-mo car loans, student loans) | A line of credit where the borrower can use the funds repeatedly up to the credit limit and make partial or total payments towards the amount borrowed (e.g., credit cards, home equity lines of credit) |
Interest Rates | Usually lower than revolving credit | Usually higher than installment credit |
Payments | Repay principal plus interest within a set timeframe | Repay at least the minimum monthly balance |
Failure to Pay | The lender can repossess the house, car, etc., and charge you penalties | You will be charged interest and late fees on any portion of the balance you don’t repay. Interest (APR) charges can be over 20% |
Best Practices | Repay principal and interest on time and in full | Repay outstanding balance on time and in full each month |
How to Build Credit:
- Get a credit card.
- Only charge what you can afford to pay off in full each month.
- Pay on time and in full each month.
- Avoid having too many accounts.
- Check your credit report and score annually.
- Keep that credit card open, even if you move on to another type of card.
For your viewing pleasure, click on this video: Building credit for the first time
What Doesn’t Build Credit: Opening and closing credit cards, prepaid debit cards, PayPal credit cards.
How to Maintain Good Credit: Once you begin establishing your credit history, you want to make sure you pay off your credit card bills and loans on time and in full. Your payment history makes up 35% of your credit score. Your credit score allows lenders to evaluate how likely you are to repay your debts. A credit score can range from 300-850. The higher the score, the more financially trustworthy you are. A good credit score is 700 and above.
Don’t think your credit score is a big deal? Think again. Your credit score can affect your ability to qualify for a credit card, the amount of credit extended to you, the APR on your credit card, your ability to qualify for a home or auto loan, as well as the interest rates on those loans, even your ability to land that dream job (employers run credit checks in addition to background checks).
For your viewing pleasure, click on this video: Credit Report versus Credit Score
Curious about Odyssey's NexGen program? Email Anne.Simpson@odysseypfa.com to learn more.
Editor's Note: This blog post is part of the July 2017 edition of Odyssey NexGen Newsletter. Reviewed & approved via C2C by BT 7/11/17