What is credit? Credit is a form of "I Owe You". It is a contractual agreement that allows you as the borrower to purchase products or services without cash on the condition that you agree to repay the lender the amount spent, plus interest.
Why should I care? According to a recent article in the Wall Street Journal, "11% of teenagers have credit cards, including 6% of those 13 and 14." Like most teens, you probably don't have a card and haven't given much thought to financial credit, but it will most likely be a big deal to you in a few years. Learning the ins and outs now will make you that much more knowledgeable and prepared when the time comes for you to get your first car loan, credit card or college loan.
Having credit is convenient, but it is important for you to control your credit and not the other way around.
Avoid these pitfalls:
Late/missed payments: A history of late and missed payments for all types of credit may mean increased interest rates, penalty fees and in extreme cases, accounts closed. A record of late and missed payments may also be reported to credit agencies and have a negative impact on your ability to receive future credit.
Bankruptcy: A history of bankruptcy will cause you problems in re-establishing a good credit history; you will be considered a "credit risk" and it may prevent you from receiving other credit (i.e. home loans and car loans).
Too many credit cards: Too many credit cards may indicate to lenders financial irresponsibility (paying everything with credit instead of cash). Creditors may evaluate you as having a level of risk which is too high.
Default on a loan: After as little as 30 days of missed payments on a loan, companies may turn you and your defaulted loan over to a collection agency, which could result in the following: repossession, excessive collection fees, legal action, garnished wages and garnished income tax refunds. You may also make yourself ineligible for future government loans, such as student loans for yourself or your children, and you'll still be required to pay back the original loan.
Some consequences of poor credit:
Getting a student loan: A poor credit history makes you a risky candidate for a student loan. You not only jeopardize your ability to pay for your education but your future children's as well.
Renting an apartment: A poor credit rating can affect your ability to rent property. Landlords can legally review a tenant's credit report before allowing a lease to be signed. You may be required to put down a larger deposit or pay slightly higher rent than other renters because of poor credit. Keep in mind that electric, natural gas, even cable companies, run credit reports that could affect your deposit.
Getting a job: Bad credit can affect your ability to get a job. Employers can use a credit report when they hire you to gain an estimation of your fiscal responsibility. A poor credit rating can affect anyone whose job requires a background check or security clearance. Poor credit can also affect job promotions and retention. Why? If you have severe credit problems you are viewed as having the potential to steal from your employer.
Getting my first house, condo or car: You may get turned down for a loan because you have too many open lines of credit (credit cards, personal loan, car loan, student loan) or a poor credit history. Lenders view all open lines of credit as potential debt and debt you'll pay before your house, condo or car loan.
Getting more credit: Bad credit or a poor credit rating will have a negative impact on your ability to get more credit. If your credit report starts reflecting late, missed or defaulted payments to other creditors, lenders believe there is a higher risk of you not meeting the terms of their credit agreement.
What can I do to avoid these problems?