By Colin Hughes
The earlier in your life you develop credit – and good credit at that – the earlier you will put yourself in a better spot financially. Developing good credit is not a tough thing to do, and it will help you save you money in the long run.
Two of the most important reasons to develop your credit score are that it will help you with getting approval for loans and will help you obtain a lower interest rate on potential loans. This can potentially end up saving you a large amount of money over your lifetime. For example, the difference between a monthly payment for a fixed 30-year $400,000 dollar loan at 3.5% interest and 4.5% is $230 a month.
This equates to a loss of over $82,000 over a 30-year period. Just a 1% hike in your interest rate can have an astronomical effect on the amount you pay in interest. Imagine if it was an extra 2.5%-3%, what financial burden this would create.
In addition to saving money on your loans by obtaining a lower interest rate, it is also a smoother and more promising process of getting approved for your loan with a good credit score.
When looking at different types of loans it may be more important to have a better credit score to get approved. For instance, in most cases for personal loans you need a 610-650 credit score at the bare minimum to get approved. Generally, you need around 620 or above to get a mortgage.
You may qualify for a mortgage with a credit score in the 500s, although you’ll pay a much higher interest rate. So, if you have a credit score of 550, then you may be able to get an interest rate of 6.35% or higher — this will accumulate thousands of extra dollars paid in interest on your loan.
There are many benefits to having good credit. You will qualify for lower interest rates and have a higher percentage chance of getting your loans approved. There are other very valuable reasons to maintain good credit. While you have good credit, you have more negotiating power, ability to raise your borrowing limits, and obtain easier approval for rental homes and apartments.
In addition, many employers do credit checks on potential employees as well. This helps them determine how organized people may be, as well as their likelihood to commit fraud based on the potential of financial distress and desperation.
Now, how can you get a good credit score you may ask?
There are a few different ways you can develop good credit as a young person. When aiming to develop credit, you should always shoot for a baseline credit score of 700 or higher. 700-and-up for a credit score is considered a good starting point to be in good standing for most of the major loan approvals based on credit.
The first and most common way for young people to start off their credit journey is to get a secured card. A secured card is most commonly used for young people who have little to no credit. Put simply, a secured card is a credit card for which you must put a deposit down.
Because young people have little-to-no financial history, credit card companies need a way to protect themselves. So they hold the deposit when the account is open. This is one of the first steps in developing positive credit. The Discover card is a secured card. You can obtain this card with a range of credit scores from 300-629.
After proven reliability, you may be able to open another account and use a more traditional credit card. One of the most commonly used credit cards often recommended for students is the Discover student cash back card. This is a great card for those new to credit card usage.
An important aspect to look at when choosing a card is no annual fee. Many people see the annual APR (annual percentage rate) and that scares them off from getting and using a credit card. It is important that you try to pick a card with a lower APR. Especially with high interest rate cards you want to insure that you are able to pay off your bill each much to avoid such aggressive interest rates.
Many might ask: why should you even bother using a credit card? Aside from raising or developing your credit score, there are still quite a few reasons most people should use a credit card. Using credit cards can be a good payment method because there are often perks or rewards offered. Some of the perks of using credit cards may be cash back, travel miles and more.
Some of these cash back rewards are seriously substantial. Specific cards may offer up to 6% back in grocery store purchases for example. In 2019, the average family of four spends $4,643 a year on groceries, which seems like an extremely conservative number to me. 6% of $4,643 equates to $278.58 in savings/cash back if you use a credit card. Some debit cards have cash back bonuses but generally not as high as credit cards.
When you develop your personal credit, you may be looking at cards with a list of perks like 6% cash back at U.S. supermarkets or even up to $6,000 per year in purchases (then 1%), 6% cash back on select U.S. streaming subscriptions, 3% cash back on transit including taxis, rideshare, parking, tolls, trains, buses and more, 3% cash back at U.S. gas stations, 1% cash back on other purchases all on one card.
You could potentially earn thousands of dollars back in rewards depending on your spending habits. In addition to the cash back benefits, perks, and rewards there are a few other important reasons that you should consider using a credit card.
Using a credit card protects you from things like fraud. For example, if you use a debit card and your money gets stolen, that money is going to be hard to recover. If fraud is detected on your credit card, you will be protected. In addition, paying with a credit card leaves a paper trail which can also be beneficial. If you were going to purchase a gift card from a business that shut down soon after issuing the card, you may be eligible for a full refund because of consumer protection laws.
Positively developing your credit and learning to use credit cards wisely will help set you up for lifelong financial success. Creating and structuring your credit card use with discipline is the way to reap the most gain in long-standing fiscal health and prosperity.
