What’s a credit score & What’s the whole point of it?
A credit score is a numerical expression made up of 3 different scores from 3 different companies, which are transunion, equifax and experian. FICO is included in your experian report and its the most popular when lenders are looking at your credit score. The number represents your credit worthiness based off a number of factors. The higher the score, the least risk you are to lenders, the lower the score, the more risk you are to lenders. Your score is calculated based off your payment history, credit utilization, length of credit history, mix of credit types, and recent applications. Credit is mainly used for consumer debt, which includes credit cards, loans or financing. Did you know that whatever product your applying for, they have a specific credit score that pertains to theat industry? In other words, the score you see may not necessarily be the same score they see. Be sure to get a full list of your FICO score. It has 7 different scores.
You Don’t ‘NEED’ a credit score
Society unfortunately has taught us that we ‘NEED’ credit or debt to navigate the world and that simply isn’t true. It’s a complete trap. Yep, I typed it. And I’m so glad I came to this revelation early in my adult life, and you should be, too. Let me explain: You see, banks are making billions off us annually, and that probably doesn’t include interest payments. The only reason you have a credit score is because of the debt you have. The ONLY reason you have a score is because your score has a relationship with debt. Why do you think someone who has no credit history, has no credit score? Duhhhhh, right?
The borrower is the slave to the lender -Proverbs 22:7
Remember when you went off to college and got those credit card offers in the mail to establish your credit? Yeah, you had no credit. Banks are designed to get us and KEEP us in debt, it’s how the world truly goes around. If you strive to never be in debt in the first place and save up for everything you NEED in life, you wouldn’t need credit. It’s that simple but, life gets in the way, right? You NEED that car everyone is driving, you NEED that latest electronic gadget everyone has. Do you see where I’m going with this?
A lot of us only NEED stuff because everyone else has it. Don’t be like everyone else. Don’t be the average person taking out a line of credit just to impress someone you don’t even like. What if I told you, you can have all those things if you just simply saved up for it? Instant gratification, and items being readily available to us at our fingertips in this day and age, is a epidemic all by itself. If we keep this up, we’ll NEVER have financial freedom to start saving for our future. After you pay your household expenses, how much money do you have left over? Do you budget? Have you taken a look at your household expenses and considered trimming down luxury items you can live without?
If most of that money is going to debts, think of how much extra money you’d have if you didn’t owe anyone? You could use that to save or invest. It’s nothing complicated. Our spending behavior, lifestyle and mindset on money makes it complicated. “But, what about an apartment or home, or business loan? I don’t have that kinda money sitting around, even if I do save.” Great question, which brings me to this next section…
What You Actually NEED a credit score for
Okay, I lied. Well, kinda. Let me explain: The only reason you need a credit score is for housing or business loans you plan to use as leverage. Most people, unless you’re a millionaire, don’t have hundreds of thousands of dollars just sitting in the bank to buy a home. That’s why you get a home loan. To receive this, they need to check your credit score. You need a decent score to obtain this loan. If your debt free and your score has dropped because you don’t have debt or utilization, there are home loan companies that check your score, but it’s not weighed as it would be thru a traditional home loan. This is called mortgage underwriting. If they see you don’t owe anyone, have the income to afford the monthly mortgage, and see that you have a savings, they are more lenient to offer you a home loan. You can check out more on the mortgage underwriting process here.
Now lets talk about business loans. In order to qualify for a business loan you need a credit score desirable to the loan company you’re applying to. I know, its like a catch 22 situation. In order to get credit, you first have to have credit. That’s why secure credit cards come in handy to help you establish or raise your credit score. I’ll talk more about this in the next section.
Let’s say you’re an entrepreneur and you’re on the road to becoming debt free. You have a good credit score because of the debt you’re currently in from paying early or on time. Let’s say you need a small business loan for your business needs. You know without a shadow of doubt the income will come in to pay off the loan and then some to pay yourself, so you apply and get accepted. The income comes in, and now you can pay back the business loan. You do this over time, early and or on time, therefore showing positive remarks on your credit score.
I recommend only doing this if you absolutely know you can pay the loan back. I recommend ONLY doing this as strategy, to increase your score. This is called LEVERAGE. Otherwise, I recommend saving up for it. It won’t take you long. After all, you are budgeting and saving and you can always pick up another hustle to get you there faster.
Now, lets say you want to rent an apartment. They need a decent score, right? They need to see that you pay your bills on time or aren’t on the run from owing a previous landlord. Common sense, right? Now, I know what your thinking. “But if I don’t want to be in debt or I’m debt free, which in turn doesn’t allow me to have a decent credit score or credit score at all, how in the heck can I apply for an apartment?”
If Your Debt Free & Your Score is Lower than Desired
I strongly suggest getting a secured credit card for this problem. It’s a credit card that helps you establish credit or raise it. A secured credit card will require a deposit and that deposit is used as your credit balance. Remember credit utilization being a big part of your score? KEEP IT LOW! Only use 30% or lower of whatever balance is on your card. Pick a bill or small reoccurring bill and assign it to the secured credit card for automatic payments. Pay the balance off BEFORE the end of the billing cycle and pay it off EARLY or ON TIME for as long as you need the card.
They will report this to all 3 credit bureaus which will then show positive utilization & history on your credit score. Be sure to apply for one that doesn’t check your credit score. OpenSky is a great option. Click here for more info. Just make sure you don’t use it to go shopping. This defeats the whole purpose. It’s designed to help your credit score, don’t be stupid and run up the utilization. Discipline yourself! When your ready to close it, they refund your remaining credit amount that’s left. If your parents have great credit, they can also add you to one of their credit lines as an authorized user. This should show positive results on your credit score. If your folks are apprehensive, just tell them you don’t plan to use any of the credit line, you just need it to help your score.
This one is a huge topic and can be a sensitive one. If you have to take out student loans to finance your education, do what you have to do, but I beg of you to PLEASE explore and exhaust all options before you do. A lot of US are in student loan debt. It’s the #1 debt, especially in millennials. This debt alone, can get in the way of us qualifying for a home loan. I wish I knew when I started looking at colleges what I know now. Back then, it was the thing to go off to college. All your friends talked about going, all your friends talked about the college experience, and so you wanted that. Nothing wrong with that at all.
They say student loans and a home loan are “good debt” but I beg to differ. The only good debt to me is a home loan because it appreciates over time and you can make money from it. College degree? It depends on a lot of factors. Is the industry your seeking even worth a degree or to be in student loan debt? Will you have a job right out of college? If your not doing something that’s constantly in demand that requires a degree, its not worth it in my opinion.
My student loans are my biggest debt and it will be the last debt I start paying off. Im ready to tackle it but Im also scared. What if it takes me FOREVER to pay this thing off? Ideally, I want to pay if off in 2-4 years if I tackle it with a vengeance but I remain hopeful. It’s definitely possible and you can pay yours off, too. It’s all about strategy and staying disciplined and focused. Remember when I mentioned that needing credit and debt is all a trap? Isn’t it funny how they didn’t need our credit scores to take out student loans? That’s something to think about.
END YOUR RELATIONSHIP WITH CREDIT, KEEP IT AS A SIDE PIECE INSTEAD
Now that you have a good understanding of credit & how it works, lets lastly talk about ending your relationship with credit and keeping it as a side piece instead. What I mean by this is to remain debt free but use credit ONLY for your advantage. NOT because you need a loan or need to afford the monthly payments on whatever, but to help elevate you. Use the secure credit card trick to raise your score if need be. Own a business? Use the business loan trick if need be. Its a comfortable feeling when you know you have the funds to cover the loan upfront as well. It’s a tool, a game, a trick at getting ahead. Just make sure your RESPONSIBLE and DISCIPLINED! I can’t stress this enough. So, if your debt free and need your score higher to get a home loan, execute these tricks ahead of time. PLAN AHEAD to succeed. NOT PLANNING is PLANNING to fail. Don’t be in a full on relationship with credit but keep it as a side piece instead. Checkout more on maintaining your credit score after you’ve payed off all your debts here.
If your serious at becoming debt free, raising your credit score or wanting info on investing or buying your first home, please check out
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