Taking the Next Step: Borrowing & Credit with EGCU

Image caption: To learn more visit: https://www.egcu.org/

By collaborating with educators, volunteers, and businesses, Junior Achievement plays a crucial role in fostering financial literacy and early financial planning in young people. The impact of JA programs is tangible, as students who participate often report increased confidence and better financial decision-making skills.

At Evergreen Credit Union we believe building credit and borrowing responsibly are essential steps to establish a solid financial foundation. Credit and borrowing are tools to help you achieve your financial goals, so use them wisely and with purpose. Read on and find out how you can start your credit journey the right way.

Take advantage of this second entry in a series that aims to help younger readers understand personal finances. If you’re already versed in the world of credit, please share these tips with friends and family.

Important Steps to Start Building!

A positive credit history can open doors to better interest rates on loans, higher limits on credit cards, and personal opportunities, such as renting an apartment or buying a car. Start building your credit by taking some of the steps below:

Open an account at a credit union or bank. This is a great way to begin building your financial history if you’re not old enough to apply for a credit card or loan. When you open an account, you begin building a record that shows your ability to manage money wisely. A solid background includes regular deposits, withdrawals, and managing transactions. This information can be valuable when potential lenders review your overall financial history.

Become an authorized user on a parent’s credit card. This can be a helpful strategy for you to build credit, as it allows you to benefit from your parent's credit history and responsible credit management. Be mindful that your credit behavior and habits can affect your parents’ credit score. Note: you must be at least 18 years old to be an authorized user on a credit card.

Get a starter credit card. A secured credit card, which typically requires a cash deposit as collateral and often has a lower credit limit, is a great place to start. This can help ease you into creating sound credit habits without having access to massive limits. Note: you must be at least 18 years old to apply for a credit card.

Apply for a 1st Time Auto Loan. Ensure you can comfortably afford the monthly payments, choose a vehicle that fits within your budget, and make all payments on time. An auto loan can be an early start to set you up for a stronger and more secure financial future. Note: in Maine, you must be at least 18 years old to take out a loan in your name. For additional questions, contact your local credit union or bank.

Image caption: To learn more visit: https://www.egcu.org/

Credit Scores

Credit scores are used by lenders to assess the risk associated with lending money and to determine the terms of loans or credit lines. Strong credit history can lead to a higher credit score, which could lead you to lower loan interest rates and better terms. Read on to learn about the 5 elements that make up your credit score. Note that the items mentioned first are more impactful than those lower in the list!

• Payment history (35%) Payment history is the most significant factor in calculating your credit score. It reflects your track record of making payments on time for credit accounts such as loans, credit cards, and mortgages. Late payments, defaults, bankruptcies, and other negative marks can significantly lower your score.
• Total credit limit and amount owed (30%) This refers to the percentage of your available credit that you're currently using across your credit cards and lines of credit. Lower credit utilization ratios are better for your credit score, as they indicate that you're not overly reliant on credit and are managing your debt responsibly. Try to keep your credit use below 30% of your total available credit.
• Length of credit history (15%) A longer credit history is generally seen as more favorable because it provides lenders with a more extensive record of your borrowing behavior. To have a positive impact on your credit score, it's important to keep old accounts open, even if they're not actively used.
• New credit (10%) Opening several new accounts, or new credit, in a short period can be seen as risky behavior, as it might indicate financial instability or an increased need for credit. Additionally, an inquiry from a lender can slightly lower your score temporarily. That said, multiple inquiries for the same type of credit (like a mortgage loan) in a short timeframe are often treated as a single inquiry to account for rate shopping.
• Types of credit used (10%) This factor considers the various types of credit accounts you have, such as credit cards, loans, mortgages, and lines of credit. A diverse mix of credit types can have a positive impact on your score, as it suggests that you can manage different types of credit responsibly.

Maintaining Your Credit Score

Maintaining a good credit score and practicing healthy financial habits can make a difference when you purchase your next car or home. Here are some tips to help optimize your credit score:

• Avoid Late payments - Your payment history is one of the most important factors that influence your credit score. Late payments, especially if they're reported as 30, 60, or 90 days late, can substantially lower your credit score. The more frequent the late payments, the more damage your credit score takes.
• Do not max-out credit cards! Not only will having maxed out cards bring financial stress, but it may reduce your score up to 100 points. On top of the decrease in your score, the limited availability of credit will leave you with no funds for emergencies or unexpected expenses. Maxing out your credit card can hinder your ability to save money or work towards important financial goals.
• Monitor your credit. Many credit unions and banks have free credit monitoring features in their mobile applications. Take advantage! You can also get a free credit report once per year at https://www.freecreditreport.com/

Use these ideas and tactics to set yourself up for financial success. It’s never too late to manage your money! Evergreen Credit Union has free online interactive tools available to everyone at https://www.egcu.org/wellness/financial-education.

ICYMI: Our first installment of this blog series can be found HERE.