Credit and Financing 101

4.6.2023 | Category: Article

Credit and financing are two concepts that are fundamental to financial health. Understanding these concepts is essential to making informed financial decisions, building financial stability, and achieving our financial goals, like paying off debt or buying a home.

About Building Credit

Credit refers to the ability to borrow money or access goods or services with the promise to pay back the borrowed amount over time. It can come in various forms, including credit cards, loans, and lines of credit. When we use credit, we are essentially borrowing money and agreeing to pay it back, usually with interest.

Financing, on the other hand, refers to the process of obtaining funding for a particular purchase or investment. This can include obtaining a loan or credit to purchase a house or a car, or seeking investment funding to start a business or launch a new project. Financing can be obtained from various sources, including banks, credit unions, and private investors.

Both credit and financing are important components of our financial lives. They enable us to make purchases and investments that we may not be able to afford upfront, and they provide us with flexibility and convenience in managing our finances. However, it is important to use credit and financing responsibly to avoid excessive debt, financial strain, and negative impacts on our credit scores.

Building Credit as a New Borrower

When you're a new credit user, building credit can seem like an overwhelming task. But establishing a strong credit history is important if you want to be approved for loans, credit cards, and even home mortgages in the future.

Here are some tips on how to build credit as a new credit user.

Open a credit account

The first step in building credit is to open a credit account. This could be a credit card, a personal loan, or a student loan.

If you have limited credit history, you may need to start with a secured credit card, which requires a cash deposit as collateral. Secured credit cards can be a good option for building credit, as they report to the credit bureaus just like regular credit cards.

When opening a credit account, it's important to read the terms and conditions carefully, including the interest rate and any fees. Choose a credit product that fits your needs and budget, and learn how to leverage it to fit your lifestyle.

Use credit responsibly

Once you have a credit account, it's important to use it responsibly. This means making on-time payments and not letting your lines of credit fall into default. Paying your bills on time is the most important factor in your credit score, so it's essential to make payments by the due date every month.

In addition, you should keep your balances low and avoid maxing out your credit cards. Ideally, you should aim to use no more than 30% of your available credit. For example, if you have a credit limit of $1,000, you should aim to use no more than $300. High credit utilization can hurt your credit score and make it harder to qualify for credit in the future.

Monitor your credit score

As you build credit, it's important to monitor your credit score to see how you're doing. You can get a free credit report once a year from each of the three major credit bureaus: Equifax, Experian, and TransUnion. You can also check your credit score for free through many online services.

Checking your credit score regularly can help you identify any errors or fraudulent activity on your credit report. If you notice anything suspicious, you should report it to the credit bureau right away.

Become an authorized user

If you don't qualify for a credit card on your own, you may be able to become an authorized user on someone else's credit card. This means that you can use the credit card, but you can work with your co-signer to make payments. Regardless, the account activity will still show up on your credit report, which can help you build credit.

Before you become an authorized user, make sure the primary account holder is responsible with credit. If they miss payments or have high balances, it can hurt your credit score. Be sure to work out an agreement with the authorized user before signing onto anything you’re not ready to.

When seeking financing, it is important to shop around and compare options from various lenders to ensure that you are getting the best possible terms for your loan or purchase. This can include comparing interest rates, fees, and repayment terms to find the most favorable financing option.

Credit and financing are essential to our financial well-being. They provide us with flexibility and convenience in managing our finances, but it is important to use them responsibly and understand the terms and conditions of any credit or financing agreement.

By practicing responsible borrowing and financing habits, we can build financial stability, achieve our financial goals, and ultimately, achieve financial freedom.