Welcome to CREDIT 101!
At the beginning of our journey, we had $10,684.01 in credit card debt and $60,228 in loan debt. Please note that we aren’t perfect and sometimes we’re a little dumb. We racked up ~$10k more in credit card debt (after paying off the initial balance 😑) and we even bought an RV that added…wait for it… $50,000 to our loan amounts. What the F**K?!
Listen, we got over our stupidity and are now sharing our knowledge to hopefully encourage others to work on their finances and credit health.
Borrowing too much money and being unable to pay it back is a serious problem in our country. Excessive debt affects more things than just your pockets.
Bad credit history can prevent you from getting:
- Jobs
- Certifications
- Security clearances
- Cars
- Houses
- Ahead in life…
Today’s post will be about all things credit. By the end you’ll hopefully understand what it is, how it’s scored and also how it’s reported. (Also read our Ultimate Credit Repair Guide)
But wait there’s more!
I’ll even give you tips on how to build (or repair) your credit health and how to use credit wisely.
P.S. Do me a favor:
Stop paying these “credit repair companies”! Nothing against them personally, but they’re crooks because you can do everything yourself. Trust me I’m debt free and we both increased our credit scores 100+ points in months.
Let’s begin friends!
What is Credit?
Credit is simply your ability to borrow money. The money you owe is called debt and you HAVE to pay it back. Car loans, mortgages, credit cards and student loans are all a form of “borrowing”. The goal is to limit the amount you borrow and to pay your obligations on time and early if possible to avoid paying large amounts of interest .
Your Credit Score
I absolutely love discussing credit scores because people can see how their poor money habits translate to a rating. Of course you could just check your bank account because it’s probably empty if you have poor money habits (ha!). You can check you credit score easily and for FREE by creating an account with Credit Sesame!
All joking aside, credit scores are a numerical rating that show lenders how reliable you are at repaying your debt(s).
Here is a visual of the credit score range:
Since there are multiple credit scoring models, generally, a good credit score is anything above 700. However, a good credit score varies by lender and credit bureau.
Speaking of credit bureaus, the big 3 are: Equifax, Transunion and Experian. Credit bureaus collect information relevant to a person’s credit habits and history, and they use this information to assign a credit score.
Here is a visual of what your credit score is made up of:
How to Improve Your Credit Score
To build a good credit score, you’ll need to:
- Pay on or before the due date
- NEVER skip a payment
- Keep your credit balances low, ideally 30% or less
- Limit applying for and opening new credit accounts (Disclaimer: you should NEVER open new credit accounts while you’re in the process of cleaning up a prior mess)
Read our detailed post on How to Increase Your Credit Score On Your Own!
If you’ve struggled with maintaining your credit cards or getting approved for one in the past, try a secured credit card with your local bank. With a secured credit card, your maximum credit limit will be determined by the amount of the security deposit you provide, your income, and creditworthiness.
Have a good credit score? Congratulations, you’ll have lower interest rates, increased borrowing options, and you’ll save money (which is the best part)! 🙌🏽
Have a bad credit score? Unfortunately, you’ll tend to have higher interest rates, less or even no options to choose from and you’ll lose money on all of the fees and interest you’re giving away. 😭
Your Credit Report
A credit report is a document that describes an individual’s history of borrowing money and repaying what they owe.
When was the last time you looked at your credit report? Has it been a month, year, or never? You should review it at least once a year to check for errors or evidence of fraud and to verify your creditworthiness (we check ours monthly).
How to easily Obtain your Credit Report
The big 3 credit bureaus offer a free report online, go to www.annualcreditreport.com and follow the directions. Be wary of other websites that advertise free credit reports! The site above is a proven source for obtaining your official credit reports from Equifax, Experian and Transunion.
To view and track your credit scores throughout the year I suggest the following:
- Check your scores for FREE with Credit Sesame
- Your Bank (i.e. Wells Fargo)
- Your credit card apps (American Express, Discover, Visa, etc)
Just keep in mind that the scores shown on 2nd party sites are estimates and can be off by 10 to 30 points in either direction.
What’s Next?
We’re working on a follow-up to this post that discusses how to read your credit report and how to correct any mistakes that you may find. We’re also going to be discussing credit cards and loans in more detail. You’ll be able to find that post here.
In the meantime, if you’d like to know more about debt payoff methods, check out this post.
Listen I am not encouraging people to borrow money, but if you ARE going to borrow you should at least have all of the information you need. I believe in using credit responsibly, I get back $50 to $100 a month by buying things with my CC instead of cash. However, there was a time that I used my CC because I simply did not have any cash to my name and that is definitely not the right way to manage things.
I hope you enjoyed this post as much as I did writing it.
Until next time, $tay wealthy my friends <3
— Dannie