When was the first time you realized you were finally an adult? Was it right after you signed the lease on your first apartment or did it really hit you the first time you went to the grocery store alone and realized your mom wasn’t there to stop you from buying 3 boxes of Little Debbies, 10 lunchables, and all of the candy bars you could fit in one hand in the checkout lane? Be honest, it was at the grocery store wasn’t it?
Being an adult is fun most of the time, you can now watch 10 hours straight of that show you love and no one is judging you! There are times though when being an adult is intimidating, you realize none of it really comes with an instruction manual. There is one thing, however, that is completely in your control.
If you are making good financial decisions it can help you in many different situations, but if you are making poor financial decisions it can severely hinder you. The consequences of your financial decisions translate into your credit score. This score affects us when we apply for a credit card, purchase a vehicle, a home, insurance, cell phones, and so much more. By maintaining a good credit score you are saving yourself money over time. See the table below for an example of this.
As you can see, the lower your credit score, the more you’re going to pay on a loan over time. So how can you prevent this? The best way is to start early. Below are a few different options to choose from.
A secured card keeps you safe from having a negative impact on your credit score. This is normally the best option for someone who has just started working and has not built any credit at all. These cards teach you how to be responsible and get into the habit of making monthly payments. The secured credit cards are safer because you are giving the financial institution your own money to put into an account to use and then you pay down the balance of whatever you use each month. If you are unable to make the payments, the financial institution will just use the secured funds you put into the account.
Low limit cards are similar to secured cards because of the low balance, but it is not your own money being used; you are actually borrowing funds from the financial institution with each transaction. These cards can help you build credit quickly without the fear of owing a large payment every month. By using the card sparingly and paying off the balance each month, you will start to see an improvement in your score after six months.
This is a relatively safe option because the limit on the card is low ($300-$500 for most cards). In order to have a positive impact on your credit score you need to make sure your utilization does not go above 30%. So, on a $500 limit credit card your balance should never go above $150. By keeping your utilization low and paying off your outstanding balance each month, you prove to creditors that you are a responsible borrower which in turn helps increase your credit score.
Many financial institutions offer vehicle loans to first time buyers. Normally, you are required to have a job (one that you’ve had for at least 90 days) and a loan amount on a vehicle that is within your budget. Also, you’ll see a quick improvement in your score by having a secured loan (the vehicle being collateral if you are unable to pay).
Any of these options will help your score improve within a year or two it really just depends on what works best for you. If you aren’t ready for a vehicle payment, the low limit card may be perfect for you. As long as you are obtaining a loan that you can afford to pay on each month, you are making a positive impact on your score. So, after a couple years you’ll be ready to buy your first car or even your first home!
Lastly, and most importantly, apply for credit BEFORE the need arises and only for an amount well within your means. It is important to establish healthy credit before a situation arises where credit is necessary. Your payment history is the most important factor to your score (see chart from Credit Sesame). So make your payments each month, keep your balances low, and over time you’ll see your credit score and financial wellness improve.
If you have questions about your credit and whether you would be eligible for a mortgage, feel free to give one of our Loan Officers a call! We would love to help!
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