How to use credit.
Most people grow up knowing that credit is important and useful to get you the things you need like a house, an education, and a car. But do people see credit as a tool or just a necessity? How does a person go about using credit as a tool?|
When a person begins their credit life they start off as a reject – harsh I know. But being a credit reject simply means that the algorithm used to calculate a person’s credit score cannot compute the information it is given; because there is none available. Being a “reject” is probably only considered good from a credit perspective because it means that you can influence your credit however you’d like; it’s more than a fresh start, it’s a brand new plate.
When a person becomes of legal age – typically 18 or 21 years old and can qualify to start using credit as a tool they are almost always granted credit based off of their current income; because there is no other information a lender or credit institution can go off of. If the individual is applying for a large amount of credit such as a car loan they will typically be denied by the institution because the risk of delinquency is too high. If the individual is applying for something modest like a credit card with $500-$1,500 limit they will most likely get approved.
There is a difference between using credit and using credit as a tool. When you use credit most people do it because they need to supplement their income, make a purchase that is larger than their debit account’s (daily) limit; such as a house, or to complete online shopping. When a person uses credit as a tool they realize that the type and amount of credit received is more important than the item or service the credit is being used to obtain.
When you use credit as a tool rather than a necessity your credit starts to work in your favour; it starts to work FOR you. When credit works for you it means that as you use your credit card, loan, or line of credit, to purchase an item or service you understand the necessary steps you need to take in order for those purchases to help improve your overall credit report, including your credit score, rather than hurt them. By using credit as a tool you are positively setting yourself up for success. When your credit score and report reflects the responsible, informed, and intentional use of the current credit you have it drastically increases the likelihood of being able to get more credit in the future. Starting of your credit history with the respect that your credit score and report deserves will help you obtain credit for larger items you’ll need down the road such as a mortgage.
In order for you to use your credit as a tool there are a few key things you’ll need to know and habits you’ll need to get into.
First, know if you have a grace period and if so, how long your grace period is. A grace period is the amount of time that a debtor (the individual using the credit extended by a lender) has from the time of their purchase until interest starts accruing. Credit cards will always have a grace period. As long as you know the time frame you have, you can pay off your purchase within that time frame and not have any interest added to your total amount owing. Most grace periods are around 20 days.
Second, always know when your bill is due. Most people utilize online banking these days and need to be aware that they should allow at least THREE business days for their payment to be posted to the account. Meaning if your bill is due on the 26th of the month, the latest you should ever be paying off your balance is on the 23rd; IF, and ONLY IF the next 3 days are business days. In order to save yourself from monthly headaches of counting business days it is smart to get into the habit of paying your bill 7-10 days before it is due. Getting into this habit also increases the likely hood that you will pay off your purchases within the grace period without even thinking about it!
Third, pay off your balance in FULL. This can be a daunting task for people who use credit to supplement their income. But for people who use their credit as a tool it is not uncommon for them to put 50-75% of their paycheck onto their credit card because they utilize their credit card throughout the month for their daily needs but only to an amount they know they can pay off with their income. People who utilize their credit like this understand how to use their credit as a tool because they understand the factors that increase their credit score, and history such as frequency, consistency, and amount of monthly payments.