Credit and Why It Matters, As Explained By Tayè K.

Namastè!

Today I wanna share something that's been a major topic of discussion in Castle Namastè. Hubby Namastè and I are working to build the magical 850 credit score.

That's a lofty goal. We figure, if you're going to work on something, why not work on achieving the highest level!

It isn't because we want to buy all the things, but because we want to be able to show the kids how to build and keep their own scores. We want to model responsible financial habits as easily as we model good manners or good hygiene.

All that got me thinking about my blog. I reach so many families with my posts, people who are legitimately benefitting from the knowledge and experience I've garnered. So I decided to step away from my usual and share what I know about credit, and how it can affect a family.

What is credit?

1 credit
noun  cred·it \ˈkre-dit\

Definition:
1.
a :  the balance in a person's favor in an account
b :  an amount or sum placed at a person's disposal by a bank
c :  the provision of money, goods, or services with the expectation of future payment <long-term credit>; also :  money, goods, or services so provided <They exhausted their credit.>

Who the heck is FICO?

Fair I·saac Cor·po·ra·tion
nounFINANCE
noun: FICO
the largest and best known of several companies that provide software for calculating a person's credit score.

What factors determine my credit score?

There are 5 top factors used by FICO to determine your score.

They are:

Payment history - 35%
Credit utilization - 30%
Length of history - 15%
New credit - 10%
Credit mix - 10%

Those 5 factors show potential creditors how much of a risk extending credit to you would be, or not be.

So, why do you need credit if you have a good-paying job and use cash for purchases? Why does credit matter if you're never planning to use it?

Oh, but you will use it. Or at the very least, yours will be checked.

To buy or lease a car, the dealership will check your credit to ensure you aren't a financial liability to them, meaning they won't want to deal with someone whose credit shows a poor history of payments or has reposessions. When you go to rent or purchase a home (purchases typically involve banks and loans of some amount or other for down payments), the landlord or bank will run your credit looking for, in addition to good payment history and positive account(s) information, evictions or dispossessory marks. (A dispossessory is when a person is evicted using a warrant, a very common process in Georgia in particular.)

While having money in hand says, "I can pay this now," most situations involving a large purchase will involve credit which says, "I have money now, and I will also have and can be trusted to pay money later as well."

Companies will run either a light inquiry (to confirm your information as you've presented it, as well as look to see how many derogatory marks exist or if you have existing debt to their company) or a hard inquiry (where they pull the entire report). Watch the amount of inquiries you allow, as too many hard inquiries can hurt your score.

We can always just buy a car outright or rent from a landlord who doesn't run credit, Tayè!

This is true. But think about this--a person who does not check your credit for something as important as your home, might very well be preying on your limited credit history or bad credit situation to rent a subpar home OR to fleece you of hundreds in the name of good faith deposits. While paying rent on time will not build your score, the eviction that person could legally still file will definitely hurt. If you are never evicted, all is well! I personally don't recommend doing any financial business dealings without full legal procedure, because it protects both buyer/renter and seller. It's a good practice to ask if your payments will be reported to the credit entities (TransUnion, Experian, and EquiFax).

In Georgia, there is such an influx of uninformed renters that there exists, the renters rights handbook, available here.

...but you already secured a home, with no credit?

Now you need utilities. Yes, utility companies run your credit as well. It's generally a light inquiry but possibly a hard inquiry. If that inquiry reveals a lack of creditworthiness, prepare for a large deposit before services can be rendered. Imagine needing electricity but being denied due to credit--house would likely have limited options, and coughing up a large deposit can be next to impossible for the average person.

...so yeah, you do and will continue to, need credit.

To condense the major points into a short list, here we go.

1. Be mindful with your credit.

While credit card offers typically begin pouring in at age 18 and store employees are often required to offer you the store's card, think about the long run. "Buy now, pay later" is incredibly tempting when your funds are low and your wishes are high-- it the instant gratification of today can be the denial of your dream home tomorrow.

2. Avoid unnecessary inquiries.

Each hard inquiry takes your score down. A point or two doesn't hurt much--but if you're being turned down and need to try more than one company, those points can add up quickly. Do your homework first, then apply for your needed credit.

3. You needn't pay anyone to "fix" your credit.

I see people get caught up in this scam all the time. While it does work, think about what's being done! That person or company is not magically giving you a higher score--they are simply disputing the derogatory remarks on your report. The results will be no quicker than if you did this yourself! And you totally can, do it yourself. For free.

4. To build credit, you must have credit.

What, Tayè?

You read me right. The best way to build credit is to use the credit you have. Obtaining a secured card and paying on time will both raise your limit AND your credit score! (A secured card is a credit card to which you have applied a down payment to assure ability to pay--depending on your score, that down payment could be as low as $29 or higher.) Refer back to number 1--use this credit wisely. (Personally I use my card for emergencies OR the very rare small splash--think Bath & Body Works or a fancier Tayè Day in prep for anniversary shenanigans. Certainly not every day.)

5. Watch for scams.

There exist in this world, as many scams as there exist, people needing an immediate fix. No one can legally sell you a new social security number. No one can "wipe" your credit history. No one can "double" your creditworthiness overnight. Please be mindful of any offer that seems too good to be true--because they usually are.

6. CHECK YO'SELF!

And by yo'self, I mean yo'scores. Check your credit report with the big 3 (Equifax, TransUnion, and Experian) at the very least once a year. Checking your own credit does NOT lower our score, and can provide all the information you need to repair, rebuild, or increase your creditworthiness. Two popular sites are this one and this one. Both are free. Creditkarma.com does not require a credit card, and includes the TransUnion Dispute Tool as well as recommendations for your credit range AND an itemized breakdown of your credit report.

It is a fair amount of work to build your credit, and you'll get more NOs that SUREs at first, but it is worth it. Think about it. So much inancial strait and general hassle can be avoided by being responsible and knowledgeable about credit and how it works. I've got a few good sites for you to expand on what I condensed.

Here.

Here.

Here.

Financial stability is possible for everyone, provided they know where to start. Many view credit as a luxury, something not everyone can have. That couldn't be further from the truth.

Why is it so important??? In a financial emergency, credit can be the difference between a problem solved OR selling off necessities or relying on GoFundMe. To be able to look at a financial problem and say, "I can handle this," is more than a relief--it's a necessity in today's world. I'm hard pressed to think of a situation where having good credit won't provide a feasible, or even favorable, outcome.

When you bring children into the equation, establishing credit becomes even more pertinent. Emergencies and surprises are like the drink and fries to the Happy Meal that is, raising a family. On one hand, you could use the credit RESPONSIBLY to treat the kids at holiday time. More realistically, you could lean on your solid credit in the event a kid needs braces or wants to take an extracurricular activity involving expensive instruments and lessons. (Example--Princess Namastè is going to take up clarinet. I have secured her instrument and beginner lessons at a peach of a rate due to my credit! If I had to pay cash outright without a good score to back me up, my dear little darling girl would be folding some cellophane over a combination and playing the homemade kazoo chorus.)

I was taught a great deal about credit before I reached adulthood, but many families don't have the time or knowledge to impart. I firmly believe in each one teaching one, and I sincerely hope this has been a starting point or stepping stone for you as you forge your own journey to financial stability and independence! Do check out the links provided throughout this post, and do share among your circles. We can all do this, we just need a starting point. You needn't necessarily reach for 850, but you can definitely boost your scores and make your life a bit easier.

Happy studying!

Namastè!

-- Tayè K. ♡