Infographic: Choose Your Own Credit Adventure
Your credit score may seem like a nebulous concept with little importance in the real world. In fact, the opposite is true. A good credit score can help you meet a lot of life’s goals, whether to get approved for loans, obtain lower interest rates on both credit cards and loans, or rent a home or apartment.
So how can you try to make sure your credit score stays nice and high, better enabling you to reach those goals? By knowing the potential consequences of your answers to a variety of financial questions life can throw at you. Where you go on your credit adventure depends on how you answer them.
Do You Need to Take Out Student Loans?
When figuring out how to pay for college, many students rely on the help of either federal or private student loans. While these loans can make it possible to take more courses, pay for housing, and sign up for a meal plan, what really matters is what happens after graduation.
Once you’ve completed your education, your loan provider will most likely expect you to start paying off your loans almost immediately. Soon after receiving your diploma, you’ll owe your provider a certain amount each month. Whether each bill is for five dollars or five hundred dollars, it will be your responsibility to take care of each and every one. The question is, how will you do that?
- If you pay them all on time and in full, you may see your credit score impacted as a result.
- If you’re late on just a couple of payments, you may see a drop in your credit score. While being late on one or two payments might not cause your score to plummet, it can lower it.
- If you simply ignore them and let them pile up, you may see your credit score go down, especially if a debt collections account is opened in your name.
With these possibilities in mind, it’s important to plan how you’ll handle repaying your loans before you decide to take any out in the first place.
Do You Want to Use a Credit Card?
Your credit card’s limit may seem like an arbitrary number which is harmless until it’s exceeded. Maxing out your card increases what is referred to as your utilization ratio, which is often a major factor when it comes to your credit score.
For students, college grads, and full-time workers alike, credit cards can seem like an appealing way to make necessary purchases without having to worry about the financial details until later.
However, the reality is that, once you pass a certain threshold, your financed purchases can have a negative effect on your credit score. Let’s say that, between making loan payments and taking care of living expenses, you’re having a little trouble making ends meet. Getting a credit card seems like the best option for you, and after receiving it, you’re able to expand your budget. How do you handle your new spending capacity?
- If you use your credit card only for lower-cost, basic necessities, such as gas and groceries, you may be less likely to approach the card’s limit. And if, by keeping your spending to a minimum, you’re able to make your credit payments on time each month, you could see an increase in your credit score.
- If you use your credit card for basic necessities but also splurge occasionally, you may find yourself creeping closer to your limit. It might still be possible for you to make all of your payments on time and steer clear of exceeding your limit, but you may find it takes a little bit of extra care and caution on your part.
- If you spend without discretion and focus more on extravagant purchases than on real necessities, you could soon find yourself with a maxed out credit card on your hands. This can negatively affect your score, and has the potential to do so even more if you max out several cards instead of just one. Additionally, spending beyond your means can make it more difficult for you to stay on top of your monthly payments, which presents another possibility of your score being lowered.
Would You Like to Take Out a Mortgage?
As life goes on, it’s possible that at some point or another you’ll find yourself wanting to own your own home. Homeownership brings a lot of freedoms, but it also usually comes with the issue of managing a mortgage.
Taking out a mortgage loan is considered a big financial step, and one that shouldn’t be taken lightly. However, finding a good lender who can offer assistance makes all the difference in the buying process. Before beginning down the road to a home loan, consider how you will manage the obligations that come with taking out a mortgage loan.
- If you have taken many potential financial circumstances into consideration and planned for each of them, you may be able to make all of your mortgage loan payments on time. This can not only help to keep your ownership of your home secure, but can also increase your credit score.
- If you manage to make most of your payments on time but are late on a couple of them, your credit score could remain unchanged or be lowered.
- If, for whatever reason and at whatever point in time, you begin failing to make your payments altogether, your home could go into foreclosure. This scenario, in addition to causing you to lose your home, can have a severely negative impact on your credit score.
The bottom line behind all of these possible credit paths is that each of your decisions can affect your credit score, your economic status, and your future, for better or worse. The important thing is to get started by checking your credit, establishing goals, and making decisions that map to them. The next time you’re presented with an important fiscal decision like one of these, which option will you choose?
About Becky Frost: Becky Frost is Senior Manager of Consumer Education for Experian Consumer Services, which offers credit monitoring products like freecreditscore.comTM. Find Becky on Google Plus.
This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.
Published by permission from ConsumerInfo.com, Inc., an Experian company. © 2014 ConsumerInfo.com, Inc. All rights reserved.