It’s always scary to know how to teach your kids about money and credit. So many horror stories exist of being thousands of dollars in credit card debt, defaulting on loans (that can result in the loss of your home, car and other property) and a tanked credit score that never seems to rise up again. These stories scare many people away from taking on credit and even view credit cards and loans as a bad thing altogether. In reality, much of what Americans desire to maintain a first world quality of life requires a credit profile of some degree. So how much do you really need credit?
The term may bring up mental flashes of gangsters banging at your door demanding payment, but if you plan on going credit-free, be ready for a very all or nothing approach when it comes to making big, out-of-pocket purchases. If that’s not realistic for you, loans are available to give you a break when you need to make a big purchase without saving up for months or even years beforehand. Not all loans are necessary, but others are usually required to make more important quality-of-life purchases, like an auto loan to pay for a car to get you where you need to go and a mortgage to pay for a house to live in. You may have to build a little credit before applying for loans, however. Generally, an average FICO credit score below 580 will make a mainstream lender unlikely to approve your application.
Proof of Identity
Many companies are validating the identity of their customers and future employees with a credit check. For example, a local utility company may ask for pertinent information to run a credit check on persons attempting to connect services. According to American Tenant Screen, this is a measure to avoid utility fraud, which can be financially devastating to a victim and leave them unable to connect utilities until the problem is resolved.
Yes, you need credit to build credit. You need to be able to build yourself up to a diverse credit profile over a period of time, with little to no late payments and as few account closures as possible. It shows lenders that you’re low-risk and responsible with finances, making you more attractive to lend to. It may sound daunting, but there are many credit options out there tailored for every level of credit. 20SomethingFinance.com suggests starting with a secured credit card with a $200 limit. With consistent on-time payments you can then move on to higher credit limits and better credit offers.
Credit isn’t quite the boogeyman that some people make it out to be. It just requires a lot of restraint to make sure we don’t spend more than we can afford to pay back and to have a plan to get things back on track if we do make mistakes.