Everything You Need to Know About Credit: Build Credit, Credit Cards, Child Credit & Business Credit
Earn Your Leisure・68 minutes read
Shan de Martin, a certified credit educator, highlights the necessity of financial literacy and effective credit management, particularly for underserved communities, drawing from her personal experiences and extensive research. She advocates for maintaining a strong credit profile through responsible credit card usage, understanding credit scoring factors, and actively managing accounts to mitigate the impacts of negative credit events.
Insights
- Shan de Martin, a credit educator, highlights the critical role of financial literacy and credit management, emphasizing that a poor understanding of credit can lead to significant financial pitfalls, as she experienced firsthand with her own high-interest car loan due to a low credit score.
- Her extensive journey in credit education began with a Facebook group that grew to over 600,000 members, showcasing the demand for accessible credit knowledge, particularly among underserved communities, and leading to her certification through FICO to better equip herself in teaching these essential skills.
- Key strategies for improving credit scores include maintaining a solid payment history, keeping credit utilization below 30%, and understanding the importance of statement dates, as these factors collectively influence creditworthiness and can significantly impact financial opportunities.
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Recent questions
What is financial literacy?
Financial literacy refers to the ability to understand and effectively manage personal finance, including budgeting, saving, investing, and understanding credit. It encompasses the knowledge and skills necessary to make informed financial decisions, which can lead to improved financial stability and security. Individuals who are financially literate can navigate complex financial products, understand the implications of their financial choices, and plan for future financial goals. This knowledge is crucial in today’s economy, where financial products and services are increasingly complex, and the consequences of poor financial decisions can be significant. By enhancing financial literacy, individuals can better manage their resources, avoid debt, and work towards achieving their financial aspirations.
How can I improve my credit score?
Improving your credit score involves several strategic steps aimed at demonstrating responsible credit management. First, ensure that you make all payments on time, as payment history is a significant factor in your credit score. Keeping your credit utilization low—ideally below 30%—is also crucial; this means you should aim to use only a small portion of your available credit. Additionally, maintaining a mix of credit types, such as credit cards and installment loans, can positively impact your score. Regularly checking your credit report for errors and disputing any inaccuracies can help maintain a healthy score. Lastly, consider keeping older credit accounts open to enhance your credit history length, as a longer credit history can contribute positively to your overall credit profile.
What is a credit report?
A credit report is a detailed record of an individual's credit history, compiled by credit bureaus such as TransUnion, Equifax, and Experian. It includes information about credit accounts, payment history, outstanding debts, and any public records such as bankruptcies or foreclosures. Lenders use credit reports to assess an individual's creditworthiness when applying for loans or credit cards. The report also contains personal information, such as name, address, and Social Security number, which helps identify the individual. Regularly reviewing your credit report is essential, as it allows you to monitor your credit health, identify potential errors, and understand the factors that influence your credit score.
What are the benefits of good credit?
Good credit offers numerous benefits that can significantly enhance an individual's financial opportunities. With a high credit score, individuals are more likely to qualify for loans and credit cards with favorable terms, such as lower interest rates and higher credit limits. This can lead to substantial savings over time, especially on large purchases like homes and cars. Additionally, good credit can improve chances of approval for rental applications, as landlords often check credit scores to assess reliability. It can also positively impact insurance premiums, as some insurers consider credit history when determining rates. Overall, maintaining good credit opens doors to better financial products and services, providing greater financial flexibility and security.
What is credit utilization?
Credit utilization is a measure of how much credit you are using compared to your total available credit. It is expressed as a percentage and is a critical factor in determining your credit score. For example, if you have a total credit limit of $10,000 and you have a balance of $2,000, your credit utilization rate is 20%. Lenders typically prefer a credit utilization rate below 30%, as lower utilization indicates responsible credit management and reduces the risk of default. High credit utilization can negatively impact your credit score, signaling to lenders that you may be over-reliant on credit. Therefore, managing your credit utilization by keeping balances low and paying off debts promptly is essential for maintaining a healthy credit profile.
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Summary
00:00
Empowering Financial Literacy Through Credit Education
- Shan de Martin, a credit educator and owner of Road to 750 and Credit Academy, emphasizes the importance of financial literacy and credit management in personal finance discussions.
- Her journey into credit education began in college when she discovered her poor credit score while attempting to finance a car at a 28% interest rate.
- After realizing her lack of credit knowledge, she researched credit repair, initially sharing insights with family and friends through a Facebook group that grew to over 600,000 members.
- Shan became certified through FICO and board certified as a credit educator, focusing on teaching credit management to underserved communities in an accessible manner.
- The FICO certification program, lasting eight weeks, covers credit scoring intricacies, including how each item on a credit report affects the overall score.
- Credit scores are derived from three bureaus: TransUnion, Equifax, and Experian, with FICO scores being the industry standard for major financial transactions.
- Key factors affecting credit scores include payment history (35%), credit utilization (30%), credit age (15%), and hard inquiries and credit mix (10% each).
- Maintaining a payment history free of late payments is crucial, as a single late payment can drop a score by up to 100 points.
- To build good credit, individuals should have at least two revolving credit cards, keep utilization below 10%, and maintain a mix of short-term and long-term installment accounts.
- Understanding statement dates is vital; credit utilization is reported on the statement date, not the due date, necessitating timely payments to maintain a healthy credit profile.
13:39
Essential Tips for Building Strong Credit
- A strong credit profile is essential for improving credit scores, with lenders considering more than just the score itself when evaluating creditworthiness.
- Frequent use of buy now pay later services for small purchases under $200 can negatively impact credit scores, as they are viewed as low-level loans by lenders.
- Credit cards can significantly impact credit scores within 60 days, unlike loans, which take longer to show benefits; understanding due and statement dates is crucial.
- For a $200 credit card, pay the full balance by the due date and keep the balance below $20 before the statement date to optimize credit utilization.
- Carrying a small balance of 1-3% on the statement date can demonstrate credit usage, which lenders prefer, as zero utilization may indicate inactivity.
- Request credit limit increases every 91 to 120 days, ensuring to have automated payments and at least two recurring charges on the card for better approval chances.
- Use credit cards for daily expenses, but only spend what can be paid back within two weeks to avoid debt accumulation and maintain financial health.
- Parents should add children as authorized users on credit cards by age 17 to help establish their credit history before they turn 18, facilitating better credit opportunities.
- Closing credit cards can negatively affect credit scores; only close cards with annual fees or if not applying for loans in the next six months, while maintaining other accounts.
- Keeping older credit cards open is beneficial for credit age, as they contribute positively to credit reports, even if they do not receive increases or are rarely used.
26:31
Essential Tips for Maintaining Healthy Credit
- Maintaining a credit card for 3 to 6 months increases credit age and FICO points; avoid closing cards unless necessary to preserve credit history.
- Assign a subscription service, like Netflix, to unused credit cards to ensure activity and prevent the bank from closing them due to inactivity.
- Adding a child to a credit card at age 17 is recommended; adding them at 12 or 13 may expose them to credit risks before they can manage it.
- A healthy credit profile is more important than a specific score; maintain at least four open accounts to avoid penalties and improve borrowing power.
- A credit score of 680 or above generally allows access to most credit products; achieving this score is often easier than perceived.
- Avoid purchasing trade lines to improve credit scores; if not related, the system may omit these from your score, rendering them ineffective.
- When disputing credit report inaccuracies, request validation of negative accounts rather than claiming fraud; this increases the chances of successful removal.
- Late payments remain on credit reports for the life of the account; however, their impact diminishes after three years, with one late payment needing 11 on-time payments to offset.
- Request goodwill adjustments from creditors to remove late payments; if successful, this can restore lost points and improve credit standing.
- Credit scores can affect loans, employment, and personal relationships; maintaining a healthy credit profile is crucial for financial and social stability.
40:05
Improving Credit Scores Through Strategic Management
- Cosigning can negatively impact credit scores; it's crucial for spouses to have individual credit accounts rather than solely relying on co-signed accounts to build credit effectively.
- The Credit Card Act of 2009 allows spouses to apply for credit using household income, enabling stay-at-home partners to establish credit independently.
- To improve bad credit, individuals should focus on building credit by maintaining at least four accounts: two credit cards and two installment loans, one short-term and one long-term.
- When obtaining a new credit card, use it immediately to report a small balance (1-3%) to maximize credit utilization benefits and boost the credit score.
- Student loans can positively impact credit scores if managed properly; they typically do not report late payments until 90 days past due, allowing time for deferment requests.
- Individuals with overwhelming credit card debt should stop using their cards, consider closing them temporarily, and negotiate a payment plan or settlement with their bank.
- During tax season, banks are more likely to settle debts, making it an opportune time for individuals to negotiate lower balances or payment plans.
- Collections can be managed; older collections have less impact on credit scores, and establishing new credit can help mitigate their effects.
- The lowest FICO score is 300, and individuals with bad credit can still improve their scores by actively building credit rather than waiting for seven years.
- It's essential to contact student loan servicers to request deferment before accounts become 90 days past due to avoid negative credit impacts.
53:29
Effective Strategies for Managing Credit Card Debt
- To eliminate credit card debt effectively, use the Snowball Effect by paying off the card with the highest interest rate first, then move to the next highest.
- If maintaining or improving your credit score is a priority, focus on credit cards with utilization over 48%, aiming to bring them below this threshold to avoid penalties.
- Reducing credit card utilization below 48% can prevent a 15-point deduction per card on your credit score, while cards between 30% to 47% can lead to a 10-point deduction.
- For optimal credit health, aim to reduce all credit card balances below 30% after achieving the 48% target, as lower utilization positively impacts your credit score.
- Business credit is evaluated separately from personal credit; establishing a strong personal credit score can facilitate easier access to business credit with lower interest rates.
- Personal guarantees (PG) on business credit can lead to lower interest rates, as lenders consider personal credit profiles when extending business credit.
- Maintain three essential credit cards: one for everyday expenses, one for emergencies, and one for larger purchases, ensuring a balanced approach to credit management.
- Regularly monitor your credit through myfico.com or Experian, checking at least quarterly and downloading official credit reports annually from annualcreditreport.com.
- Road to 750 is an online platform offering financial education on credit repair and building, with a membership program, Credit Academy, available for $39.99 per month.
