Why do High School or College-level classes don’t have Personal Finance courses? How does the new generation of students learn how to properly manage their credit scores? During my time as a student, I have never had a class teach me this up until the near end of my career. Because of this, I have now created this post for the current and next generations, explaining the basics of how credit works.
Credit is a measurement of the risk that a creditor, such as a financial institution or a retail store, agrees to grant to its customer. For example, if you get a loan, the lender will give you the money, and you will have to repay that loan over time along with interest and possibly other fees.
Why does Credit exist?
The use of credit cards began in the United States during the 1920s, when individual firms, such as hotel chains, began issuing them to customers for purchases made at company outlets. This was made in order to avoid lending money to irresponsible customers who are already overextended or who have a history of not paying their debts.
By the late 1950s and early 1960s, banks began collaborating to share customer credit data including account balances and payment histories. And that is how credit reporting started.
Nowadays, the credit history reporting system helps banks. In other words, Lenders, such as banks and credit card companies, use credit scores to evaluate the potential risk presented by lending money to consumers and to lower losses due to bad debt (a type of expense that occurs after repayment by a customer is no longer considered to be collectible).
What is the Credit Score? How does it affect customers?
A credit score is a number that directly establishes the credit worthiness of a consumer. It can determine the interest rate people receive when financing an apartment, a vehicle or education. It also gauges how worthy a consumer is to finance a new business.
Credit score is also involved in the job interview process, quotes for different insurances, and even security checks. It is a critical number that follows the people throughout their whole lives.
A person’s credit score does not start at zero, rather, their score does not exist yet. That is because the credit score is calculated at the moment that a lender, or credit car issuer, requests to check it for the first time. As soon as it is requested most in the U.S. start at a score of 300.
Credit scores usually range from 300 to 900, with a score ranging from 300-600 considered from bad to fair, from 650-900 considered from fairly good to excellent.
How can I improve my credit score?
A higher credit score brings in many benefits, including more acmes to credit products, and lower interest rates. Up next are some helpful ways of improving credit scores:
Be on time when paying your bills: missing a payment will do a lot of damage to your credit score
Avoid making too many credit inquires: every time you apply for a new credit, your score takes a temporary small hit. If you keep doing this, the damage can be permanent
Monitor and manage your debt responsibly: keeping tabs of your transactions, how much money you need to pay for the credit. No one else will keep track of your transactions with the purpose of improving your position but you.
Keeping the credit cards balances low is key since the lower your credit utilization, the higher your score will be.
If these steps are taken, the credit scores will improve, allowing consumers to enjoy the benefits of high-scorers. Hopefully, it is of some help to you reader!
References
O’Shea, D. (2020). What Is a Credit Score?. NerdWallet. Retrieved March 30 from https://www.nerdwallet.com/article/finance/credit-score-ranges-and-how-to-improve
O’Keefe, M.; Girard, S.; Price, M. (2014). Staging Your Business for Financial Success. Retrieved March 30 from https://learning.oreilly.com/library/view/business-finance-basics/9789077256404/xhtml/ch01.html
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