For me at least, credit has always been one of those topics I never knew much about besides the fact that if you didn't pay your credit card bill on time, you'd get stuck with paying a late fee on top of the money you still owe on the card (or something like that). But after doing some research and talking to one of my financial advisors (my father) I've found that credit can be both good and bad. Let's talk about how, friends.
So, you may need credit history for a few things that come with adulting such as borrowing money, applying for an apartment, and financing a car (or anything really). Why would you need credit history for these things? Because by definition, credit is the ability to borrow money or access services with the understanding that you will pay later. So, when you establish and build credit history, it implies that you are responsible enough to repay the money you borrow or items that you finance within a timely manner. It basically says you pay your bills on time like an adult should- if your credit history is good.
Your credit history/score can also be bad. Things that can negatively impact your credit score are :
-Not paying bills on time: Not every bill that you pay late will affect your credit SCORE. In the event that you are very late in paying a bill, the agency will wait some period of time to receive your payment (this should be listed on your invoice) and after that deadline, they can send your bill to collections. If you don't pay the collection agency and they report your delinquent payment to the 3 credit bureaus (Equifax, Experian, and TransUnion), the late payment can negatively affect your score. Now, if the company that is billing you does not have a collection agency( because companies have to pay collection agencies), your late payment can affect your credit with that company and you may have difficuly opening another account or borrowing from that company in the future.
-Applying for more credit cards: Each time you apply for a credit card, the company in which you are applying takes a look into your credit report. This inquiry can affect your score negatively depending on the type of inquiry. The two types of inquiries are called "hard" and "soft". A soft inquiry typically occurs without you even knowing it. This type of inquiry is done when you receive a credit card offer in the mail and sometimes employers check credit reports. Someone checking their own credit is also know as a "soft" pull. Soft inquiries also don't hurt your score. Multiple "hard" pulls negatively impact your score. These inquries require your signature/consent, and these inquries are requried when you apply for credit card, loans, mortages, etc.
-Cancelling your credit cards: Most people don't think about this but cancelling your credit cards that you've paid off can reduce your total available credit amount. This can have a negative affect if you have other cards with balances.
-Having high credit balances: Keeping a credit balance that surpasses 30% of your credit limit can also be detrimental to your credit. Try to keep you balance at or below 30% of your total limit on your card.
Now that we've talked about important information that pertains to those who do own credit cards, let's talk about important information for those who do not own credit cards. Specifically, how to build/establish credit without a credit card.
1. Pay your bills on time. More specifically, if you have any type of loans or medical bills, be sure to pay them on time.
2.Become an authorized user on the account of someone you trust. Becoming an authorized user allows you to get a card that has your name on it and make charges on the account. However, the owner of the card is responsible for repayment. Payments and card activity are reported on your credit profile. So, if the card is used responsibly, it can help your credit.
3. Lastly, get a credit builder loan. This type of loan is interesting. A bank agrees to put a sum of money into your account, and you can't touch it until you pay the amount back. Usually the agreement is to repay the amount between 6 and 24 months. Each payment is reported to the credit bureaus and helps your credit.
References
Nathan Young :)
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