Why You Need Credit

With recent headlines about Americans racking up over $1 trillion in credit card debt, it’s easy to start thinking about “credit” as an evil monster that is best to avoid entirely. All credit isn’t bad though. Like most things in life, it comes down to how you use it.

Want to buy a house someday? How about a reliable car? Is a kitchen remodel in your future? Do you dream about opening a small business? Saving your money with the intent of paying for these items in cash is a great goal, but if you decide that you want to move forward before saving all the cash required, then credit is something you’ll need to make it happen.

The key is to use credit responsibly. And the best time to start building your credit is now. For those just starting out, start small. A low-limit credit card that is secured by your savings account can be a great way to build credit and responsible habits. Pay your balance off in full and on time each month to establish a positive payment history, which contributes to a higher credit score, and limit how much you charge. This will also prevent late fees and penalty interest rates from kicking in, making it harder to catch up on existing bills.

A simple way to dip your toe into responsible credit usage is by only making purchases with your new credit card that you’ve already budgeted for such as gas or groceries. Impulse shopping and overspending can lead to excess debt. So can emergencies, which is why building your savings is also important. An emergency fund can help you handle the unexpected without taking on new debt.

The Long-Term Impact of Building (or not) Building Credit

Credit scores are used by credit unions and banks to help determine the likelihood that someone will repay a loan. A low credit score can end up costing you thousands of dollars with much higher interest rates on loans. It may even prevent you from securing the larger items that you and your family need, such as purchasing a new car, buying a home, or financing equipment for a small business.

Whether you’re just starting out, need to rebuild your credit, or just haven’t thought about it recently, now is a great time to check your credit report and see how you stack up. Federal law allows you to get a free copy of your credit report from all three credit reporting agencies once each year. This can help you correct errors, which could lower your score, and even prevent fraud. Visit www.annualcreditreport.com to request yours today.

What if Things Don’t Go According to Plan

A job loss or other event can happen to the best of us and derail our financial plans. If you cannot pay a loan on time, contact your financial institution right away to discuss your options. Skip-a-payment promotions, which let you pay a small fee for deferring a single monthly payment, may be helpful if the situation is temporary or a refinance or consolidation loan may assist with longer-term cash flow issues. Just be sure to reach out sooner vs. later, ideally before you miss a payment.

Building an emergency savings coupled with responsible credit usage is important for your long-term financial health. In addition to on-time payments, one of the largest factors that contributes to your credit score is utilization. This is the amount that you owe compared to your credit limits – once you exceed around 20% (i.e. you owe $2,000 on a credit card with a $10,000 limit), it can begin to negatively impact your credit scores. Making more than the minimum required payments can really help bring this back in line and boost your score.

Beware of store-front lenders that offer fast or easy cash and be sure to read the fine print before you decide on any financing option, including Buy Now Pay Later. It’s worth the extra time to call Abound to learn about the personal loans, lines of credit, and credit cards we offer before taking out a quick loan only to find out that the interest rate, payment terms, or fees are excessive.

Remember, those headlines about Americans amassing $1 trillion in total credit card debt are the result of consumers finding themselves caught in a vicious cycle of repeat borrowing. A trusted financial partner can often help you avoid these situations and keep your payments reasonable. Remember, Abound’s here for you and always happy to help you understand your options!