Being responsible with credit is important for many reasons: You save money long-term, have more choices when it comes to paying for major life milestones (like college or a house), and are able to avoid many inconveniences that less credit-worthy people may have. By living within your means, you’re also setting a good example for your family – whether you live with just a significant other or have children, too. Good habits are contagious.
Equipping yourself and your loved ones with a knowledge of all the credit basics, including interest rates, minimum payments and annual percentage rates (APR), can help prevent money missteps many years later. Conscientious spending can become second nature and build a solid foundation for your entire life.
Here are five important guidelines to keep in mind.
1. Credit history is important
Every time you pay your bills on time or apply for a credit card, you’re building credit history. This information is noted by national credit reporting agencies and used to create a “credit score” that provides an overall rating of your risk to lenders. A score of 700 or higher is considered good. Before you take out a loan for a car or mortgage, or even rent an apartment, a lender will check your credit score. Explaining future consequences helps put spending in perspective.
2. Having a high credit score will save you money
If you have a healthy credit score, it could save you hundreds of thousands of dollars over your lifetime. Mortgage rates can vary by a full percentage point and a half between the best scores and the lowest scores.1 That means over time, a person with bad credit is paying significantly more money on their mortgage than someone with good credit.
Bad credit can also affect your ability to rent an apartment and set up utilities. If you have bad credit, you might need a cosigner for your rental agreement, and you may need to provide a deposit for utilities. You also won’t qualify for a credit card with the lowest APR.
3. Be mindful of payment dates
The best way to build a good credit history is paying your bills on time. Late payments – even for utilities or student loans – can lower your credit rating. So keep track of due dates and budget accordingly.
4. It’s easier to maintain good credit than rehabilitate bad credit
Having bad credit becomes a self-fulfilling prophecy. The worse your credit score, the more money you have to pay in interest, and the more you go into debt. It’s a tough cycle to break.
5. Check your credit history every year
Family members should check their credit history every year to make sure no one is using their identity. You can check your credit score regularly with free reports from the major credit reporting agencies once a year and from services like Credit Karma. Red flags include credit inquiries you didn’t initiate, a listed address that isn’t your own and slightly misspelled first or last names.