How To Build Credit
You know when you come across someone that’s not only smart but gets where you are coming from? Paris Dean gets it and gets me more than most of my friends that went to school with me lol. I reached out to him on Facebook August 26th, 2020 and said I love this posts, and would he be ok with me sharing EXACTLY what he wrote? He said yes. At this point, after reading this and several others, there’s no need for me to write something like this at this time. Have you ever come across something that was so perfectly written that you wish you wrote it yourself?
THIS IS IT.
Without futher ado.
Paris Dean’s aka Like A Caucasian’s guide to building credit.
Disclaimer: This is for learning purposes only. Reading this doesn’t guarantee you will make money.
Guide 3: How to Build Credit Like A Caucasian (Pt. 1)
In 4,000 B.C., when Sumerian people started building the world’s first cities, the concept of “credit” was created.
Loans were made with interest and early versions of financial contracts were drawn. In the centuries since, different methods of making loans have been developed but the basic premise remains the same: We want things we can’t pay for all at once and credit makes it possible to get them.
“I gotta problem with spending before I get it.” — Kanye West
But why is credit important?
A lot of the stuff we buy is too expensive for most people to pay for all at once. But having credit makes it possible for us to buy it now and pay in chunks later.
Why do I need it?
Although credit clearly has an important role to play in keeping the economic machine moving, you’re probably still not sure why you’d want credit.
Basically, credit = (potential) wealth. Think of all the things in life that could get you to the next level. A college degree, a car, a house, a business loan. Now think of how much money you yourself have right now. See the difference? Having good credit allows people to pay for college, thus increasing their earning potential; buy a home and benefit from rising property values; or start a business and build generational wealth.
The future aside, what happens if you have an emergency tomorrow and don’t have the cash on hand? Without credit you’d panic. But if something happens and you have credit, you can cover it now and pay for it later.
But before we get too far ahead, let’s unpack exactly what credit is.
What Is Credit?
Credit is like reverse lay-a-way because you get all your stuff now and then pay for it a little at a time later. Like if you go out to eat with your friends and they spot you $20 to cover your bill and you pay them back later.
Lenders, merchants and service providers give people credit based on how much they trust them to pay back what they borrowed, plus any finance charges (interest) because they have to make money too.
To the extent that creditors consider you worthy of their trust, you are said to be creditworthy, or to have “good credit.”
How Credit Works
In the past, creditors based credit worthiness on peoples’s reputation. That obviously didn’t work out because, like on most Instagram accounts, people weren’t always who they said they were, so now they use credit history — a record of borrowing and paying back money assigned to your social security number — as a way to figure out if they should trust you with their money or not.
Your Credit Report
Your credit history is summarized in a document known as a credit report. Although we have one credit report, there are three independent credit bureaus — Experian, TransUnion and Equifax — and banks, credit unions, credit card issuers and other creditors report your borrowing and repayment information to them. The problem is that creditors don’t always report the same information to all three bureaus so we have three different credit scores.
Anyway…your credit report keeps track of everything you do that involves credit. So when you (or lenders) look at your credit report you’ll see stuff like:
* The number of credit card accounts you have, their limits and how much you owe;
* The amounts of any loans you’ve taken out and how much you’ve paid back;
* Whether your monthly payments for your accounts were made on time, late or missed altogether; and
* More severe financial setbacks such as mortgage foreclosures, car repossessions and bankruptcies.
To help them make a decision, lenders often use a three-digit number known as a credit score as the first step in deciding whether or not to give you credit. Your credit score simplifies the information on your credit reports to something that’s easy to interpret.
Credit Scoring Models: FICO vs. VantageScore
Back when lenders used your reputation to figure out if they could trust you or not, they were losing money left, right, up, square, circle, triangle, R2, and down. It was literally like a GTA code. Have you seen “Catch Me If You Can” with Leonardo DiCaprio? Well his character, Frank Abagnale, Jr. was a real person and was the ULTIMATE finesser.
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A Little About Mr. Abagnale
He became one of the most notorious impostors, claiming to have assumed no fewer than eight identities, including an airline pilot, a physician, a U.S. Bureau of Prisons agent, and a lawyer. Abagnale escaped from police custody twice (once from a taxiing airliner and once from a U.S. federal penitentiary) before he turned 22 years old. He served fewer than five years in prison before starting to work for the federal government. Abagnale is currently a consultant and lecturer for the FBI academy and field offices. He also runs Abagnale and Associates, a financial fraud consultancy company.
— — — — —
Because of people like Mr. Finéssé, two young Caucasian fellows — an engineer named William R. Fair and a mathematician named Earl Judson Isaac, created the Fair, Isaac and Company (FICO) in 1956.
When you apply for credit, lenders need a fast and consistent way to decide whether or not to loan you money. In most cases, they’ll look at your FICO score. But because competition, money, modernization and technology, the credit bureaus created an alternative credit scoring system in 2006 — VantageScore.
While VantageScore and FICO scores try to predict the same thing (risk!), their credit scoring models aren’t the same.
Here are some of the main differences between the two companies and their scores:
Tri-Bureau vs. Bureau-Specific Models
VantageScore creates a single tri-bureau model that can be used with a credit report from Experian, Equifax or TransUnion.
FICO creates bureau-specific scoring models. So, while the latest FICO Score 9 might have one name, there are actually three slightly different FICO Score 9 models — one for each of the major credit reporting agencies.
In other words, VantageScore = one report and; FICO = three different reports and scores.
(VantageScore = 1, FICO = 0)
Minimum Scoring Requirements
In order to have a score with FICO you’ll need to have a credit account (remember trade lines?) that’s at least 6 months old and activity on a tradeline during the previous six months (they don’t need to be the same tradelines).
You may be scoreable by VantageScore as long as your credit report has at least one account on it, even if the account is less than 6 months old.
Additionally, neither credit score agency will score a credit report if the report indicates the consumer is deceased.
(VantageScore — 2, FICO — 0)
The Score Ranges
With all these credit scoring models, a higher score means you’re less likely to miss a payment, which is why lenders offer people with higher scores the best rates and terms.
Again, the base FICO scores range from 300 to 850, while FICO’s industry-specific scores range from 250 to 900.
The first two versions of the VantageScore ranged from 501 to 990, but the latest VantageScore 3.0 and 4.0 use the same 300-to-850 range as FICO.
What qualifies as a good score can vary from one creditor to another. However, on the 300 to 850 scale, a score of at least 670 (for FICO) and 700 (for VantageScore) will generally qualify as having “good” credit. Anything above 700 usually qualifies as excellent.
** looks for Rachel’s two cents **
But if you’re like me when I started, you’re probably confused about what score is what, who reports what information to what bureau, and how to keep track of all the reports.
It took me a long time to make sense of it all, but I’ll make it simple for you.
Monitor Your Credit
Credit monitoring services do just what the name says — monitor your credit.
They monitor activity on your credit reports, then tells you when something happens. You could do it on your own and save a few dollars, yes, but they‘re way faster and work automatically.
Exactly what information they report depends on the provider and whether or not they charge, but it usually (and should) includes the following:
* Hard inquiries on your credit report, (someone applying for credit in your name);
* New accounts opened in your name;
* Balances and payments on your credit products;
* New address or name changes to your credit file;
* Public records, such as bankruptcies; and
* Personal information on the dark web, such as your social security number, email address and passwords
It might sound like credit monitoring services keep track of everything, and for the most part they do, but they definitely have their limits.
What Credit Monitoring Doesn’t Do
When you sign up for credit monitoring, you’ll get alerts and access to resources to help you identify and protect against possible theft, but these services can’t actually prevent fraud. It’s just the security guard that walks around with a whistle.
“I’m top flight security of the world, Craig!”
But here are a few things credit monitoring doesn’t do:
* Stop someone from applying for credit and opening new accounts in your name;
* Keep your information safe from data breaches;
* Prevent your credit card from being skimmed;
* Tell you if someone withdraws money from your bank account;
* Warn you if someone files a tax return in your name and collects your refund;
* Stop phishing emails;
* Report fraud;
* Fix credit report errors;
* Freeze your credit;
Paid vs. Free Credit Monitoring
There are a number of paid and free credit monitoring services that can help keep track of your credit.
Because of the recent data breaches — Equifax in 2017 and Capital One in 2019 — a lot of people qualified for free credit monitoring services from those companies. But if your info wasn’t leaked, you don’t qualify for the free services, but there are other free services out there like Credit Karma.
But keep in mind, just because a service is free doesn’t necessarily mean it’s better.
For example, each bureau offers credit monitoring but one is free (or Basic) and one costs (or Premium). Premium plans usually start at like $4.99 for the first month and then $24.99 a month after.
I prefer premium plans because they show you the report from each credit bureau instead of just one, which is what you get with most basic plans.
Also, the alerts you get with most of the free services only include new credit inquiries and new accounts — not balance changes, credit utilization, dormant accounts and other features offered with paid services.
If you’re ballin’ on a budget though, Credit Karma does a pretty good job of detailing all the info. But take the scores with a grain of salt because it uses the VantageScoring model, which is always slightly higher than FICO. FICO is used by more lenders so you’d do better finding one that uses FICO’s system.
My favorite is the one from CreditCheckTotal because it has an app, gives me all the information on all my accounts, and uses FICO’s scoring model.
And shoutout to Snapchat and OnlyFans models for ruining the word “premium.”
“Credit or Debit?”
Contrary to popular belief, your debit card does NOT double as a credit card. When the machine asks you if you wanna run the transaction as “Debit or credit” it’s asking you if you want the money taken out of your account now (debit) or taken out later (credit), but either way it’s your money coming out of your bank account. If you have the money, great. If not, be ready for that $35 overdraft fee.
That brings me to my next point, and your next question.
What Are the Types of Credit?
There are four types of credit:
* Revolving Credit: With revolving credit, you have a maximum borrowing limit, and you can make charges up to that limit. Every month you have to make a minimum payment, but you pay any amount of what you owe outstanding charges, up to the full amount. If you make a partial payment, you’ll carry a balance forward, hence “revolving” the debt (because it goes around and around).
Most credit cards count as revolving credit.
* Charge Cards: Charge cards are basically the same as credit cards because you have a “limit”, but they don’t let you to carry a balance: You have to pay off your whole balance every month.
* Service Credit: Your contracts with service providers such as gas and electric utilities, cable and internet companies; cellular phone companies; and gyms are all credit agreements. These companies provide their services to you each month with the understanding that you will pay for them after the fact.
Lenders don’t always report positive payments to the credit bureaus. But let you slip up and make a payment 2 days late. Your score will be HIT. But the good thing is now you can report your own payments with programs like Experian Boost. I like it because it lets you use DTE and cellphone payment history to build your credit history. It’s not a huge boost (especially if you have negative stuff on your credit), but those few points you gain could mean the difference between paying 34.99% APR on your Charger and paying 6%.
* Installment credit: Installment credit is a loan for a specific sum of money you agree to repay, plus interest and fees, in a series of equal monthly payments (installments) over a set period of time. Student loans, car loans and mortgages are all examples of installment credit.
APR, or annual percentage rate, is how much it costs you to use the lender’s money (because they have to get something out of it too). You’ll usually find APRs in the terms of your mortgage, car and and credit cards. When you take out one of these loans, the APR typically includes fees and other expenses associated with borrowing money. But the APRs you see on your credit card agreement can be a little different.
APR vs. Interest Rate
Your credit card’s interest rate and APR when you buy something are one and the same. There are other APRs and fees associated with credit cards, such as annual fees or balance transfer fees, but those are not factored into the purchase APR. That’s because not everybody who gets a credit care are going to incur fees.
Fixed vs. variable
When you’re shopping around for a new credit card, you may see APRs listed as fixed or variable. While many credit cards offer variable APRs, you may come across one that offers fixed.
* Variable APR means that a card’s interest rate can change over time. Variable APRs change based on an index interest rate, such as the prime rate published in the Wall Street Journal. When the prevailing prime rate changes, it can directly affect the variable interest rates on credit cards.
* Fixed APR generally stays the same. This means that the card’s rate is not tied to an index. But that doesn’t mean your rate will never change — it just means the issuer will likely need to contact you before raising the rate.
Different APRs for credit cards
A credit card has different APRs, and each is decided using different factors. When an issuer approves you for a card, it offers you certain terms based on your creditworthiness, like the purchase APR. Your credit scores can be a key factor in how issuers determine the APR you qualify for. Typically, the higher your credit scores, the greater the chance you’ll qualify for a lower APR. Remember, a credit card’s purchase APR does not factor in additional fees, so read the fine print before deciding whether a card is right for you.
* Purchase APR: the interest rate charged on purchases when you don’t pay off the card’s balance in full and on time each month. (Keep in mind that many cards have a grace period.)
* Penalty APR: usually triggered by spending beyond your credit limit or making a late payment. This is a higher APR that may be applied if you make a payment that’s more than 60 days late. If you make the minimum payment on time for six months in a row after the penalty APR kicked in, you can get your original interest rate reinstated.
* Introductory APR: a special temporary rate that credit card companies may offer as a perk for signing up with a specific card. Some offer 0% introductory rates for a certain period on purchases, balance transfers or both. That could be an attractive feature, but just make sure you’re familiar with when, and how much, the APR will jump after that intro period.
* Balance transfer APR: the interest rate charged on balances moved from one card to another. Some cards offer an intro 0% balance transfer APR for a set period of time, which could be worth looking into if you need to pay off credit card debt. You’ll be charged interest on any remaining balance after the intro period, so make sure you know when the introductory period ends.
How can you get a good APR?
Working toward (or keeping) healthy credit is a good way to increase your chances of getting a favorable APR when you apply for a credit card. Better credit scores could help you qualify for a lower APR, which could save you money over the long term. If you know you’ll be applying for a credit card sometime soon, you should probably start working on repairing your credit.
And that’s the end of part one. That wasn’t too bad, huh? It’s amazing how much there is to credit but how simple of a concept it is. Use OPM (other people’s money) to buy what you need now and pay for it later.