Blog Post #7 – Credit Explained

Credit Explained

Navigating Credit and Credit Cards can be scary for most people, but it is the unknown that makes it that way. Most people don’t understand them and only know what is passed down from their parents and grandparents. This old style of thinking about credit is what puts people into bad debt with the idea of building their credit or having a good score. Let’s get started with the beginning.

Credit was invented after the Second World War with the intention to boost the economy, which it did. People were buying things with this plastic card with money they didn’t have with a buy now pay later (or over time) model. And by repaying the bank, they would give you a score on how well you did called a credit score.

To throw out all the fancy jargon, a credit score is simply your score on how responsible you are at paying back the bank for the money you borrowed from them.

Back to the story. Although this model and idea did help boost the economy it was putting people in debt which showed up many years later. So fast forward to today where credit is still here but the mindset toward it has not changed. We still have people telling us how to get a good credit score, which we need, but HOW we do it is what needs to be changed. Let’s talk about what people say to validate their purchase that puts them in debt. Don’t feel judged if you’ve ever said this because it’s just an indicator.

It probably sounds like, “It’s only $300 a month, plus it can’t hurt my credit score.” “Having a car payment isn’t really that bad since I get a new car for super cheap.” “The trip was super expensive but totally worth it.” “I just threw it on a credit card so I can pay it off a little every month.” “Having a little debt isn’t that bad.” “This is basically an investment.”

Sounds like you? Well that’s why I’m here to help.

So how do we get a good credit score without putting ourselves in debt? Here’s how:

First, you open up a credit card with a low maximum balance and only put certain purchases on the card. For instance, you could only put your gas purchases on the card and then pay everything else with cash or a debit card. If you pay this off twice per month you’ll never end up with an interest payment or a standing balance on the credit card. This will slowly build your credit score without making any big time purchases and you can do this on a low college income. This way you will come out of college with 4 years of credit history and with perfect on time payments you will have a solid credit score.

That is a super simple way to start out and I plan later on to talk about credit rebuilding. But for now, starting out for newbies is where we’ll start. There are plenty of other plans for finance savvy parents to help their kids build credit but this strategy is directed more for high school juniors/seniors or starting out in college.