When I get together with my cousins we talk about everything! One minute we'll be talking about our hair and the latest beauty trends and the next minute we're having serious conversations about credit scores.
Jeanette made a statement that really stuck with me, so much so, that I thought about it for weeks, trying to put my life and experiences in perspective. She believed that a person's upbringing and family structure has a great impact on one's credit score. I wasn't in disagreement, however, Jovonn and myself believed that it's more about the education of personal finance than it is actual upbringing or unfortunately for some, the lack thereof.
So what makes the difference in those with excellent scores vs those with poor scores?
College
This is where it starts for many. Everyone remembers those credit card tables that were set up on or around campus at the local pizza and sandwich shops, there to entice you to sign up and open a credit card account and get a free pizza. These companies should rot in hell! Seriously, most college students will definitely do whatever it takes to get a free pizza, but these companies also encourage you to use the card to pay for books, groceries and other living expenses without educating you on what interest rates are and the repercussions of late or lack of payments.
With college already being a huge expense, many students don't know until they get there that day to day living expenses can get costly. So if you're wondering if I signed up for that credit card to get a free pizza, hellz yeah, I sure did! The only difference between me and another student is that I didn't use my credit card for living expenses and it's not because my parents gave me money, they were already paying for tuition and that was all they could afford. I graduated high school with two scholarships, the
Chessmen Club Scholarship which was like $500 a year and the
North Ends Mother Club Scholarship which awarded me $1,000 for the year. I knew going in, each year I was working with $1,500, that I had to manage and that was it ($1,500 seemed like so much back then!). The $500 I used for books and the $1,000 I lived off of for the school year. I may have used the credit card once or twice my senior year, my car broke down and needed a new alternator and I had a huge medical bill after getting extensive test done to see if I had a brain tumor (don't ask, I'm a bit of a hypochondriac smh). The part that saved me was by the time I was a junior and senior I was also working a part-time job so I had a bit of money coming in.
The Real World
Now you're out of school, you have a degree, student loans and credit card debt. If you're not fortunate enough to land a job right out of school, which is becoming more and more common then continuing to live off a credit card may be your only option. Some students are able to move back home, work and start paying off their debt. Even if you do find a job and get your own place you've now introduced yourself to a whole new world of financial responsibility.
Now you're looking at purchasing a new car, starting your own business, purchasing a home - you go to the bank and the banker politely says, "your application has been denied." In laymen's terms, your credit score sucks! Now all you can do is think back to those damn shoes you put on the credit card or the bill statements you overlooked and now you start to realize how serious your predicament has really become.
Credit impacts
Your score impacts interest rates. All things equal - two people go to the dealer to purchase a 2014 Nissan Altima and plan to put down $2000. However, person A has a "poor" score and person B has a "good" score. Despite putting the same amount down and getting the exact same car, person A might have to pay a monthly $500 car note or get someone with better credit to co-sign to bring that monthly payment down to a more reasonable amount. Person B may only have to pay $300 per month with no co-signer because they received lower interest rates as a result of having a better credit score - indicating that they are less "risky" and more likely to pay their note on time.
Think of it this way, interest is basically like a rental or leasing charge for borrowers. You'll always pay less if you can pay out of pocket because you're paying the actual cost. If you have to borrow money in the form of a loan, the interest is really what you're paying to "borrow" that money and on top of that you still need to pay toward the principal which is the original amount of the asset you're purchasing. If you have to borrow, which most of us do whether it be to purchase a car, home, appliances, etc. the goal is to receive the lowest interest rate possible.
If you have bad credit, you'll receive high interest loans meaning you'll be paying way more for your asset than the actual value. Let's face it, the last thing any of us need is to be paying more for our purchases than we really need to.
Your score impacts your ability to secure a loan. If you're thinking, "Hey, it doesn't matter I'll pay more for my loans, I don't care," think again. In some cases, depending on how low your score is a lender may not even lend to you, even with high interest rates! Want to start a new business? Need money to buy or lease property for your shop? Need to purchase equipment? Want to buy a home or re-finance? Well, banks can and will tell you "NO!, sorry we can't give you a loan." No institution wants to give money to someone who doesn't pay their bills on time. So all those dreams you have and work so hard towards can easily be crushed because of one not so simple score.
What are the components of your credit score?
Your payment history is the biggest and most important piece. Pay on time! Before taking a loan or even with your credit card you will always know how much you are responsible for paying per month. You have to be real with yourself. If you can't afford $500 a month for your car or $2000 a month for your rent or mortgage, find another car or home that is more affordable. Parking lot pimping is not cool! Don't get caught up in the hype of trying to appear as though you're making six figures when you'e bringing in a modest income. It's not that serious! You definitely don't want to live above your means but truly the most financially secure folks tend to live below their means.
The best feeling is knowing that you make way more than you spend on expenses. These are the people that don't have to continuously check their account to see if they have enough money in the bank to buy an outfit, go out for dinner or buy tickets to a game. If you can't pay back a purchase you put on a credit card by the end of the month, chances are you don't need to make that purchase. Don't get me wrong there are always exceptions, if you know you're responsible enough and will make the necessary sacrifices. If you're not willing to sacrifice and skip out on buying those new Jordans or taking that girls trip because you need to put that extra money down on some debt that you owe - don't put the expense on your card.
Building It Back
You can always redeem yourself from mistakes made in the past. I say this not just in regards to financial hiccups but in life. It's not what happens to you but how you react, that matters. I was reading on Forbes.com an article
"3 Stories Of How People Rebuilt Low Credit Scores" and these individuals found ways to within 2-3 years rebuild their credit history.
A few things you can do:
1) Create and stick to a budget - scale back on non-necessities and put that money toward paying your debt down. Focus on those credit cards with the highest balance and/or interest rate. Keep in mind this isn't for the rest of your life, just for enough time to actually put a dent in your debt.
2) Set up automatic payments so that you don't miss a payment. Paying your bills on time, consistently will help increase your score. As you know, delinquent payments and collections have negative impacts on your score.
3) Only open credit card accounts if needed. Sometimes, opening an account can be helpful IF you're dedicated to paying on time.
4) Keep your credit card balances low. You don't want your balance -to-limit ratio to be out of whack! If you have 3 credit cards giving you a total of $30,000 of available credit and your balance of the combined cards is $20,000, this is no bueno! At that point you're getting close to maxing out your cards, which never looks good to a lender.
5) Monitor your credit report at least 1 to 2 times per year. Know your score and be sure there's no fraud on your account or mistakes that were made. I recently spent 8 months correcting my credit score due to a late bill paid by a medical provider after I got in my car accident. I sued and the lawyers were working with my medical providers to get bills paid and somehow a bill was paid extremely late. You know who that impacted, me and MY SCORE. It dropped my score significantly and I had no clue until I happened to go to the bank to apply for a loan. Due to my low score I couldn't get the business loan so I had to investigate and go through hell to finally get it all squared away, months later, but it was worth it. My score is now back at it's "Excellent" status and I'm looking forward to applying for a home equity loan hassle-free!
A lot of my peers are in their 30's and 40's with growing kids. Be sure to talk to your kids about money, how to save and spend responsibly. Let's be the generation of parents that talk about credit history and scores before our children leave for school or go out to explore the "real world." There's so much riding on these scores, let's give our children the tools they need to start off on the right foot - with limitless potential!
