The following is a guest post from Martin of Studenomics. Martin has just released a super-helpful guide that shows you how to completely conquer credit before you hit 30. You can’t live life on your own terms until you crush your credit card debt and get ahead of the game.
“The most important thing for a young man is to establish credit – a reputation and character.” — John D. Rockefeller.
We all know that we need to establish credit and create a budget. This is the sort of advice that’s very easy to hand out. We all have that friend that tells us to build credit or to create a budget. Why should we even bother with following this advice?
Do you know why you need to build credit? I honestly didn’t until I started writing about the topic so don’t feel too bad just yet. Let’s look at what I learned about why you need to establish credit in your 20s…
Your pockets will feel it.
When you go to apply for a car loan or home mortgage your interest rate will depend on your credit score. Even 1% on a home loan can impact your pockets by thousands of dollars over the duration of the loan. How much more money will you spend on a home mortgage with a poor credit score?
According to Ramit Sethi’s book, I Will Teach You To Be Rich, on a $200,000 30-year mortgage the difference between 4.384% and 5.973% is $70,560! Yes you read that correctly. That’s over 70 grand more. You could’ve got yourself a nice summer ride with that money instead of blowing it on interest. You could also use that money to pay down your mortgage quicker saving you even more money. All that money because of a credit score. It’s amazing when you think about it from this perspective.
Why does your credit determine your interest rate? Let’s look at it from this point of view.
You have lots of money saved up. You have two friends that are looking to borrow money. One friend, Steve, has only asked you for money once. When he did he returned the money within a week and bought you a coffee just to show his appreciation. In your mind Steve has great credit with you.
On the other hand, you have a buddy, Josh, that has a history of borrowing money from friends. You’re not even sure that you’ll ever see this money again. You know that he won’t even really appreciate your gesture. You’re hesitant to loan Josh the money because he has poor credit in your opinion.
Now on the same day both Steve and Josh come to borrow money from you. You tell Steve that it’s going to cost him a dinner and you expect the money back within 4 weeks. Josh (the dude with poor credit) doesn’t really agree to any strict terms. You don’t even want to loan him the money. He begs and pleads and even gets his father to co-sign the loan. When you finally do agree you tell him that you expect 10% on top of the loan just so that you ensure you’ll get your money back.
This is a simplified example. The general message is accurate. The person loaning you the money wants to know that they’ll get their money back. If you have excellent credit they’ll trust you. If you have poor credit and a history of poor decision they’re going to charge you a higher interest rate to ensure that they get their money back. It really is that simple.
You can live in the fantasy world and say that you shouldn’t buy a home or a car until you have 100% of the cash saved up. The reality is that very few of us will actually do this. Most of us will end up with a home mortgage or a car loan. If you don’t start building credit now you’re going to suffer by getting a higher interest rate.
Your employer will care.
A credit score is a tangible number that potential employers look at. For better or worse, it is what is it. You can complain about this all that you want, but your whining won’t stop from potential employers from checking out your credit score. The justification that I heard is that an employer will want to see if you’re reliable. Since so much of your credit score is based on how reliable you are with money it shows them if they should trust you or not. Another common reason that an employer will care about a credit score is that it’s just a filtering system when there are many candidates applying for the same gig. You don’t want a lack of credit to prevent you from getting that dream gig.
Now you know why you need t build credit now if you don’t want to hate yourself later. The great news now is that moving forward you now have an incentive. You can begin to make moves in the right direction. Good luck to you!
If you enjoyed this guest piece, then don’t forget to grab your copy of Martin’s new guide.