If I could relive my 20s again, there are a few things I would
do differently. First, I would have called my mom before getting
that tattoo. Second, I would have driven right past the animal
shelter. And third, I would have paid a lot more attention to my
credit. Lucky for you, I learned those lessons the hard way so
you dont have to.
So, after you get off the phone with your mom and finish
searching for dog-friendly apartments on Craigslist, read this
list of 20 things every 20-something should know about
credit.
Everything You Need to Know About Credit in Your
20s
1. Credit scores range anywhere from 300-850.
Your credit score is an indicator of how much of a credit risk
you are to issuers. The higher the credit score, the better.
2. You have three credit scores.
There are
three major credit bureaus
, Equifax, Experian and TransUnion. Each one maintains a separate
FICO score for each consumer in its database. As a result, you
have three separate scores and three separate credit reports.
Which leads me to the next fact…
3. Credit reports are not the same things as credit
scores.
Your credit score is calculated off the information on your
credit report. Your report shows your history of using credit,
including every open and closed account you have, your payment
history, credit limits and balance owed. Your credit score, also
known as a FICO score, is based off that information.
4. Having good credit isnt just about getting credit
cards and loans.
When it comes to maintaining good credit, many people think of
qualifying for a loan or credit card. A healthy credit history
can help you secure financing and save you thousands on interest
rates, but it can also lower your insurance premiums, help you
rent a place to live or waive certain deposit requirements.
According to FICOs testimony before a House Financial Services
subcommittee, its scores are used in about 10 billion decisions
worldwide each year.
5. You are entitled to a free credit report from each
bureau once a year.
Under the Fair and Accurate Credit Transactions Act, you can get
a free copy of your credit report once each year from each of the
three major credit bureaus at annualcreditreport.com. However,
these reports will not contain your FICO scores. You will have to
sign up for services or pay a fee to access those.
You can space out your free credit reports so you get one
every four months. This tactic helps you maintain a healthy
credit report and keep tabs on any potential fraudulent
activity.
6. Bad credit doesnt have to haunt you forever.
Your credit score is just a snapshot of your current credit
situation; it will change as your history improves or
worsens.
7. There are five factors that affect your credit scores.
FICO breaks down your credit history into
five categories
, each with different weights. The five elements are: payment
history (35 percent of the total score), credit utilization (30
percent), length of credit history (15 percent), new credit (10
percent) and credit mix (10 percent).
8. There is no single trick to raising your credit score.
There is no one-size-fits-all path to a better credit score. The
best thing to do is request your credit scores and look at the
score factors. Those will tell you the top four reasons your
scores arent higher. Once you have identified what is affecting
your credit scores negatively, you can start making changes to
improve them.
9. You do not need to have debt to have a credit score.
There is a popular myth out there that you have to have debt to
have a credit score. In fact, some people believe credit scores
reward people who have debt and that being debt-free means you
will have a credit score of 0. The truth is, the way the
scoring models work means its impossible to have a 0 credit
score. Also, the scoring systems actually penalize you for having
debt. You can pay your balance in full each month to grow your
credit score without taking on any debt.
10. Your credit score will not drop if you pull your own
reports or scores.
You can check your own credit reports and scores without hurting
your credit history. It has no effect on your credit.
11. Making the minimum payment is the worst way to pay
off credit card debt.
Making the
minimum payment
#160;is the longest and most expensive way to pay off credit
card debt. For example, if you make minimum payments (say, 2.5%)
on a card with a $2,500 balance and 18% APR, it could take you
204 months to pay off the debt and cost you $3,173 in interest.
Yikes!
12. Making a payment that is less than the minimum
doesnt count.
Making less than the minimum payment counts as a missed payment,
which will bring down your credit score, trigger a late fee and
possibly raise your interest rate. If you cant make your minimum
payments, call your credit card issuer ASAP.
13. You must use your credit card to build credit
history.
Using your credit card should not be confused with keeping a
running balance. A smart strategy is to use the card each month
and pay the balance off in full. Keep tabs on what you spend so
you dont get hit with a high bill you cant pay back.
14. Be wary of retail cards.
When compared to traditional credit cards, retail credit cards
area usually very easy to get, have low credit limits and very
high interest rates. Sure, discounts at your favorite store can
be tempting, but are you really saving money if you are more
tempted to shop or you cant pay your bill in full?
15. Maxing out your credit cards damages your credit
score.
Even if you dont exceed your credit limit, running up your bill
to the maximum allowed will have a huge negative impact on your
credit score. Some experts recommend keeping your balance under
30 percent utilization, but the safest thing to do is just pay
your bill in full each month.
16. You can negotiate with your credit card issuer.
It is possible to negotiate the terms, interest rates and
payments on credit balances. If you are faced with a large bill
you cant pay, you can sometimes negotiate the total balance of
the credit card debt owed. If you end up settling credit card
debt, you will be required to pay the new total in full and you
should expect your card to be closed and your credit reports to
take a hit. Negotiating your credit card debt should only be done
in an emergency.
17. There is a difference between good debt and bad debt.
Borrowing money at a low rate to purchase a home or car isnt bad
debt; you need a home to live in and you probably need a car to
get to work or school. There are personal finance experts that
promote the idea of paying cash for everything, including a new
home or car, but that option doesnt work for everyone.
Bad debt is expensive debt
, including high interest credit card debt or student loans,
especially if your post-graduation payments will push you close
to the poverty line.
18. Employers can pull your credit reports.
The Fair Credit Reporting Act allows employers to pull your
credit reports as part of employment screening. Some states
restrict the use of credit reports for employment screening but
it has not been outlawed altogether. Also, once you have been
hired, employers maintain the right to pull your reports at any
time during your employment. While credit reports do nothing to
determine your ability to perform job duties, they can shed light
on personality traits, like responsibility. Of course, credit
reports dont tell the entire story and this might not seem fair,
but keeping your credit history as pristine as possible will help
you stand out in a sea of applicants.
19. Prepaid or secured credit cards wont fix your bad
credit.
A secured credit card is offered by most major credit card
issuers and allows the user to make a deposit, or prepayment,
equal to the credit limit. These cards are reported to the three
major credit bureaus, but they do very little to help you build
credit. There is some value, but it takes more than just a
secured card to negate any derogatory items on your credit
history. These cards are best for people who are establishing
credit for the very first time.
20. Having bad credit doesnt make you a bad person.
The good thing about making credit mistakes in your 20s is that
you have plenty of time to fix them. This is the time in your
life to make mistakes, learn hard lessons and develop good habits
that will last a lifetime.
This article originally appeared on
gobankingrates.com
.
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