This is a guest post in our Young Professionals & Money Series from Patrick Passaretti, Larry Passaretti’s son.
What is credit?
I like to think of credit as your financial reputation – that is, a fundamental necessity to your financial success. It is important to know that most of your financial decisions may be reflected on your credit report. The sooner you understand the premise of credit, the quicker you will be able to improve on it.
Establishing your credit history is something I learned about from my parents when I was 15 years old. They told me I should use a credit card to pay for purchases of $50 or more instead of using cash, but that I would be required to pay that amount off at a later date. I realized credit was like getting a “loan from a friend” that I would have to pay back within a certain time frame or I would be penalized. I was now responsible for my financial reputation.
Being 15, I was excited that I could spend money without having to pay it back immediately. However, my parents did remind me this “loan from a friend” had a limit of $500 on the card and it had to be paid back in full. Originally, I did not realize the dangers of a credit card. If I don’t pay the full balance on the card by the end of the billing period (about 30Days) an interest charge is place on all of the charges I made. I told my parents, “Don’t worry, I’ll pay!” And the reward of paying off my previous charges is that my credit rating will improve.
Now that I had the understanding on how to maintain and build credit, I began to use my credit card more frequently. Using the money from my salary as a bus boy and other various jobs, I worked to pay down this new debt that I created with my credit card purchases. At the end of every month, I made sure to pay my bill in full rather than just the minimum amount so I was able to avoid any interest charges on my purchases. While the minimum payment requirements are enticing and could be as low as ten dollars, many people believe that it is an “easy way out.” But there’s the catch! By paying only the minimum amount required, you may be charged interest on your balance and this interest must be paid back or it will continue to build up. This means that, in extreme cases, if you only pay the required minimum each month you could be paying for that new flat-screen television you bought for months or years.
I am 21 now and have been building my credit for over six years. Every year I’m able to run my credit reports and effectively manage them. I keep up to date with all of my bills and make sure that I pay those bills on time. A good credit reputation, as I see it, is something that everyone should strive to have. It simply shows how reliable you are with regard to paying back loans to financial institutions worldwide. If your credit reputation is damaged then you will find it is a lot harder when it comes to getting approved for any type of loan, whether it is a personal, bank or car loan.
Keep your reputation up. Show the world, and more importantly yourself, that you know how to make responsible financial decisions.