Kian's Journey to Understanding and Building Good Credit for Financial Health (Full Transcript)

Speaker 1: This is Kian. He is trying to get his finances in order, and he's heard that it's important to have good credit. But what is credit, really? Credit is the ability to borrow money to buy something, based on the trust that you will pay it back later. Sounds great, but borrowing money with credit is not free. You usually have to pay it back with interest and fees. How Kian uses credit will determine his credit score. Kian discovers that a good credit score is extremely important, because it can impact multiple areas of his life, including his ability to rent or buy a house, getting approved for a loan, and even possible job opportunities down the road. So what is considered a good credit score, and how do you get one? FICO credit scores range from 300 to 850, and lower scores represent higher credit risk for potential lenders. A good credit score is generally considered to be anywhere from 690 to 850, with 850 being an excellent credit score. Kian learns ways to start establishing good credit, such as opening a checking and savings account, paying all his bills on time, paying down his outstanding debt, checking his credit report every year, and protecting his identity. Although he understands what a good credit score is, he isn't sure how the scores are calculated. But some research shows him there are five things that determine his score. Payment history, ratio of debt to available credit, length of credit history, types of credit used, and recent searches for credit. Kian still has one question about his credit report. What's in it? He finds out that it contains his personal information, along with his overall credit and payment history, any inquiries from companies wanting to view his credit information, and any negative history, like debt, that was turned over to collections. Checking his credit report frequently, he's told, will prevent mistakes in his credit history that might lower his credit score, and help make sure no one has stolen his identity and taken out credit under his name. So how does someone check their credit report? It turns out that there are three nationwide credit reporting agencies, Equifax, Experian, and TransUnion, that will provide Kian with a free credit report once every 12 months if he asks for it at annualcreditreport.com. This is the only source authorized by federal law to provide you with your yearly free credit report. Kian knows that his student loans will help him build credit once he starts to repay them, but he decides to look into credit cards as another way to build credit. Kian is a little wary of credit cards. He knows they can be a great tool if used wisely, but they can be seriously damaging to your credit if you're not careful. Some great tips for wise credit card use include only charging what you know you can pay back each month, and making payments on time and in full to avoid paying any interest. If you're not sure owning a credit card is right for you, you can always use alternatives like sticking with cash or your debit card, using a prepaid card, or using a secured card. A secured card is a great way to build credit without the risk of a normal credit card. It requires you to put down a cash deposit for collateral that becomes the credit line for that account. You can charge up to that amount and pay it off each month, just like a regular credit card, but without the risk. Kian decides he's going to look into getting a credit card, but isn't sure what to look for. A peer mentor at school tells him that every credit card offer comes with what's called a Schumer box that contains important information like interest rates, fees, and terms and conditions that are important to know. This will help Kian compare different credit cards to determine which one is right for him. Kian has a credit card and he makes a plan for staying on track to building good credit. He decides to only have one credit card so it's easy to track his spending, always pay his bill on time, and pay off his balance each month. Even with a credit card, he is still making financial goals and a spending plan to help him decide how his money will be spent instead of just hoping he has enough to buy what he needs and relying on a credit card when he falls short. Kian now understands credit and why it's important to his overall financial health. Spending Credit Wisely will make him an empowered financial decision maker.