3 Credit Lessons You Wish Were Taught in School
What you learn in high school doesn’t always prepare you for Real Life. While you were busy memorizing the law of cosines, practical concepts about finances were never mentioned. Here are 3 credit lessons you wish were taught in school.
For most of us, complex trigonometry stays in the classroom. But eventually, everyone needs to borrow money. Credit helps us take on big purchases — whether it’s an education, new house, or unexpected expense. Too bad a lot of us don’t know how it works. So keep reading for some credit lessons.
Luckily, it’s never too late to learn.
Here are three things teachers should have taught you in class. Have a glossary of important financial terms open in another tab while you scroll down. If a term or two gives you trouble, you can look it up and learn the definition.
1. Interest is the Cost of Borrowing
When it comes to taking out a personal loan or line of credit, a financial institution may add on finance charges and interest fees to your principal, or the amount you borrowed.
This is considered the cost of borrowing, and it’s how these financial institutions make their money.
Finance charges and interest rates can vary significantly between institutions — from something as low as zero or as high as 400 percent. Depending on how high your rate is, your cost of borrowing could be expensive.
That’s why you should always wait to borrow money until you absolutely need it in an unexpected emergency.
2. Interest Rates Are Set by What’s in Your Consumer File
If interest rates impact the cost of borrowing, everyone would want the lowest interest rates possible, right? Unfortunately, not everyone can get them.
Financial institutions set their rates according to the risk they take by lending money. They’ll look at your consumer file and credit score to determine the likelihood you’ll pay your bills on time.
A high credit suggests you’ve paid your bills on time in the past, making it reasonable to assume you’ll continue to do so for your new LoC. As a result, the best rates are available only to those with a high score. The lower your score is, the higher your rates will likely be.
This is why it’s important to focus on adding positive payment history to your file. Keeping bad payment history off your report will help build positive entries and unlock better rates.
3. Your Credit Utilization Ratio Matters
This ratio shows how much of your total credit limit you use.
Unlike your high school math class, utilization ratio isn’t something you want to score 100% in. This score means you’re maxing out your accounts, and to some financial institutions, it means you’re struggling to make ends meet.
You might already know maxing out your accounts is a bad idea. But what’s an acceptable limit for this ratio? Generally, 30 percent or less is acceptable; however, the lower you go, the better it looks to financial institutions that check this ratio.
If this account gets shared to a reporting agency, it may impact the impression your consumer file leaves on financial institutions. This, in turn, may impact the type of interest rates you can get.
The lesson here? It’s all connected!
You may have left school long ago, but you’re never too old to learn. Financial literacy is a life-long learning process, so keep finding out new things about how to manage your finances and continue reading about credit lessons.
