Scott Bennett, CFP®, Provides Necessary Clarity on Credit
In my time at 3rd Decade, I’ve been able to present to a variety of people on a wide range of financial education topics. The list stretches from college freshmen, medical students, university fellows, young adults just starting their careers, employees of large corporations, seasoned vets, and even some within the financial services sector.
In almost every single one of the presentations, I can remember, the “complicated” topics like investing, retirement accounts or taxes aren’t the ones that get the most attention. Instead, CREDIT always incites the largest number of questions from the audience. After thinking a lot about why this is, I’ve compiled the top reasons why so many questions revolve around credit.
People understand that credit is important and have a baseline understanding of how it can affect you. A lot of people know someone with bad credit and have seen how challenging and expensive that can be.
Bad Info Travels Fast
When 3rd Decade did a poll surrounding the best and worst financial advice our readers had gotten, we received quite a few responses from people who even had high school finance teachers accidentally misrepresenting key credit facts.
It’s More Confusing than People Let On
There are a lot of factors that go into building your credit. Sprinkle in some math, and credit can be a recipe for confusion.
Past a Certain Point, It’s Assumed You Understand
In college, I remember having a whole seminar for the incoming freshmen around credit; how to build it, use it, and what to look out for. From that one seminar (that I was fortunate to even receive) I was now supposed to be an expert on credit. That was the last bit of education I received before doing some digging myself way past college. Young adults who don’t understand credit feel shame because they’re expected to know all about it.
It’s By Design
According to this article by Magnify Money, Americans paid over $121 Billion in credit card interest in 2019. That’s a lot of money! Chances are that if a lot more people understood the nuances of credit cards, it would drop pretty substantially.
Knowing all this, I wanted to break down some of 3rd Decade’s most important and easiest topics to understand surrounding credit:
- Your credit score is a 3 digit number that lenders use as a reflection of how financially responsible you are. All of the lenders report to the 3 credit bureaus: Equifax, Experian, & TransUnion. Your score is based on the information they report.
- When someone is referring to “good or bad credit”, chances are they’re talking about your credit score.
- CreditKarma, myFico, and your bank/credit union are good places to check your score.
- “Payment History” and “Amounts Owed” are the most important factors when calculating your credit Score. MyFICO has a breakdown of exactly how your credit scores are calculated here for those who want to do a deeper dive.
- Your credit report is a list of your bill payment history, loans, current debts, and other financial information that make up your Credit Score. This page from USA.gov does a good job of comparing credit scores and reports.
- Everyone should go to annualcreditreport.com to check their report at least yearly and check for any inaccuracies.
- You do not need to carry a balance to build credit. Carrying a balance does not boost your credit score. This is the most important piece and a misconception we hear way more than we’d like to. If you have a credit card, your goal should be to never pay interest on it. You still build credit when you pay off your full amount each month.
- Paying the minimum balance does not mean you are avoiding interest.
And Most Importantly…
- If possible, do not cancel a credit card even when it’s paid off. If you are able to monitor the card, use it occasionally, and pay it off monthly, leave it open. Generally speaking, the more credit you have available to you that you’re not using, the better in the eyes of the credit bureaus, and the longer your credit history the better as well. However (and this is a big however), if that card is going to lead to unhealthy spending or if you’re not able to keep track of your payments, it’s better to cancel it. Having late payments or owing a substantial amount compared to the amount of credit available to you does more damage to your score than the positive effect of keeping the same line of credit open for a long time.