I hate credit cards.
I hate the concept of living beyond your means. I hate the idea of life in a society that bases your worth off your ability to spend.
So, when my fiancé and I started looking at getting pre-qualified for a loan for a house, and our loan officer saw that I had zero credit history, I was reluctantly forced to get a credit card.
I had no idea where to start. I had advice coming from every direction from my parents to my banker. Which cards could I even qualify for? Do I carry a balance or pay off my debt every month to build my credit? What percentage of my limit should I spend to up my score? According to creditcards.com, I’m not the only person my age that has no idea how to use credit cards to build credit properly. In 2015, approximately 39% of Millennials had some credit card related debt. Of people 18-24 that sent ranged from $611 to $1109 on average- yikes. CBS News has also reported the following stats “People aged 19 to 34 had a 625 average credit score, compared to 650 for Generation X (aged 35 to 49) and 709 for baby boomers (aged 50 to 69) and the “greatest generation,” or those born around the Great Depression.” Basically, as a generation, we have no idea what the hell we are doing with those powerful pieces of plastic in our wallets.
Credit Cards: A Brief History
If we’re going to understand exactly how all of this works, we need to go back all the way to the introduction of credit cards in the 1920’s. Oil companies and hotels started issuing them to customers for purchases made at those establishments (basically a more modern version of having store credit). In 1958, American Express created a card that charged cardholders annual fees and billed them on a monthly basis- in which they had to pay off their balance. Also in 1958, “Visa” was born as a bank credit card system. In this system, banks bill the account of consumers for purchases made on the card. The Cardholder can then either pay the bank in total or make monthly installments with interest. This is now the system we use all over the world. The global financial crisis of 2008-2009 (The Great Recession) prompted the U.S. House of Representatives to pass the “Credit Card Holders’ Bill of Rights”, which would provide additional consumer protections and restrict or eliminate credit card industry practices deemed unfair or abusive.
So, what is credit?
Way back when, According to Investopedia, “credit” is, “A contractual agreement in which a borrower receives something of value now and agrees to repay the lender at some date in the future, generally with interest. The term also refers to the borrowing capacity of an individual or company.” So, if that’s what credit means, what exactly is a credit score? Bankrate sums it up best with, “Your credit score is a three-digit number generated by a mathematical algorithm using information in your credit report. It’s designed to predict risk, specifically, the likelihood that you will become seriously delinquent on your credit obligations in the 24 months after scoring.” While there are several credit reporting institutions, FICO scores are used by 90% of all financial institutions. FICO scores range from 300 to 850. A low score indicates you pose a high risk of defaulting on payments, while a high credit score indicates you are low-risk for defaulting on payments. Scores of 700 or greater are considered excellent to lenders. Out of these possible 850 points are five main elements:
1. Payment history: (35 percent) — Your payment account information, including any delinquencies and public records.
2. Amounts owed: (30 percent) — How much you owe on your accounts. The amount of available credit you’re using on revolving accounts is heavily weighted.
3. The length of credit history: (15 percent) — How long ago you opened accounts and time since account activity.
4. Types of credit used: (10 percent) — The mix of accounts you have, such as revolving and installment.
5. New credit: (10 percent) — Your pursuit of new credit, including credit inquiries and number of recently opened accounts
Is your brain as fried as mine is learning all this awesome new information? Take a break, and come back for Part II here.
All images from Google images.
All graphs my own.