Episode #22 - So you want to understand credit?
Everyone needs it, but few know what it actually means - read on to find out.
Intro:
Pilot fish You know, the ones that eat sharks’ leftovers and parasites that live on the sharks. I’ve always seen the world of airline points as a type of pilot fish. The value comes from mining things that are leftover from airlines and credit card companies. The time it takes to make these things worthwhile typically extends beyond the average person’s capacity, but those who rise to the occasion can do quite well - well, at least before the pandemic.
Credit card miles were the hook that got me further along my credit building journey and I thought it would be worthy to take a few moments of your time to understand personal credit and then in a future episode I’ll fan out to cover credit as it applies to businesses. Don’t worry, they are related topics.
Background:
The premise of credit is that a borrower - typically someone without enough money to buy something in cash - needs to convince a lender that they will be able to pay back the amount of money they borrowed. Sure, you know your cousin, they work a steady job. You have some cash on hand, so you can take the risk yourself and lend them some money - if they don’t pay you back, they get barred from family gatherings.
Believe it or not, the word “credit” first appeared in English in the early 16th Century from French and Italian, each word meaning “trust” or “loan.”
Enter, the 19th Century in America. Folks were generally wary of buying things with a loan and there were also few, if any, ways to guarantee those loans to banks. This was especially true of purchases for pleasure. Banks didn’t have a great way to know if borrowers would pay them back, so they too were wary of handing out loans. (Thanks to Rocket HQ for some of this info).
Takeaway:
I know I have a variety of folks getting these notes, but imagine for a moment: You don’t have a credit card or any records of you making timely/consistent payments for different things you borrowed money to purchase. Would anyone want to take the risk of lending you money? Unlikely. So, this is kind of like the whole “you need 10 years of experience to get an entry level job” paradox, but thankfully, there are intro-level credit cards that can help individuals build up their credit.
What will you need the credit for other than getting a loan? Great question and the folks at Experian have a few examples:
Landlords may check your credit when deciding if they'll rent you an apartment or determining how large a security deposit to require.
Insurance companies may use your credit scores as factors in determining your rates.
Utility companies may check your credit before deciding to let you open an account or borrow equipment.
Prospective employers may use information found in credit reports to make a hiring decision.
Your credit report can even be used to verify your identity, and for other purposes defined by federal law.
I don’t think this is the place to elaborate on the whole calculation of how credit scores are developed but, perhaps, a later episode.
Interact:
Do you have a credit card in your own name? No? Then it’s time to get one. Comment below and we’ll see what we can get set up for you.
Yes? Well, when was the last time you checked your credit score? Generally, once a year is the minimum number of times you should be doing it. So, if you haven’t done it yet in 2020: go for it!
Many sites do this for free, I suggest you start by googling it. If you can’t find it, then reach out.
Gratitude:
Thanks for enduring the strange no-Sunday Jewish calendar for the past 4 weeks or so. I hope to be back on track. Stay tuned for some exciting news about a podcast I’m working on.