Hi friends,
What is credit? How do I grow my credit? I’m not even sure what other important questions I should be asking.
My parents are immigrants and I’m also one. I moved to the U.S when I was 11. Unfortunately my parents didn’t have the chances that I had and they didn’t get much of an education. Sometimes I feel like I’ve had to navigate a lot of life in the US by myself (SATs, college applications, school loans, etc.) on top of helping my parents navigate it too. I’m a young adult now and I don’t have any guidance and would really like to start thinking about my future. I think credit is a good place to start. Any info/advice is welcome, I literally barely know much about the system. Thank you.
In: 6
I don’t think people understand what ELI5 means.
#ELI5
**What is credit?**
I’ve got a collection of tools. Screwdrivers, hammers, wrenches. I’ve got a pretty good collection.
You ask me to borrow a hammer. You promise to return it in a week.
Exactly a week later, you return my hammer.
If you do this over and over, returning my tool on time, that means I CAN TRUST YOU. I don’t have to worry about never getting my tools back.
**”How much I trust you” is CREDIT.**
Mary always returns my tools, but she returns them late. I trust her a little less, so her “credit is lower”. I will still let Mary borrow tools from me, but maybe I won’t let her borrow my most expensive tools.
John never returned my drill! So his credit is terrible. I won’t let him borrow any more tools from me, ever! I don’t trust him at all!
**Strangers?**
Patel came to ask me to borrow a tool. I’ve never met Patel before in my life! He’s a total stranger. Should I trust him? How much should I trust him? How will I know he will return my tool?
Well, Patel has borrowed tools from other people in town, and he always returns them. Those other people TOLD ME that I can trust Patel. So I trust him, and I let him borrow my tool.
**So credit is shared.** That is, if you **establish credit** with me, by always returning my tools, then I can share that information with others. And they share that information with me. And so we all tell each other how good someone’s credit is.
**Real World**
Okay, no more talk of tools. Let’s talk money.
You want to buy a car, or home. So you need to get a loan. You go to the bank. The bank manager asks himself, “If I loan Funky_Nebula some money, can I trust them to return the money? On time?”
So the bank asks other banks, or other institutions, “Hey, have you ever had any experience with Funky_Nebula? Can they be trusted?” And if the answer is “yes, Funky_Nebula can be trusted”, then the bank is more likely to give you the loan.
But if the other people say, “No! Don’t loan money to Funky_Nebula, they return it late!” then your bank might not give you the money.
**How do you establish (grow) credit?**
Well you have to start somewhere. If nobody knows who you are, and nobody’s ever loaned you any money, then you have no credit. Nobody will trust you.
But some people are willing to take the risk. They’ll say, “I’ll give Funky_Nebula a loan, but it’s just for $10. So if they don’t pay it back, I don’t lose a lot of money, just $10.”
So sometimes you have to start there. Take a small loan.
But if you pay it back on time, then you’ve got a little bit of trust! Someone trusts you, even a little bit! You have a little bit of credit now.
You can then probably ask another bank for a slightly bigger loan, maybe $50. And you repeat the process, over and over, until you can be trusted to pay back $10,000 or more.
And after 10 years of always paying back loans on time, especially big loans, now you have “great credit”. Most banks will trust you.
**Not Just Money**
If you want to rent an apartment, your “credit score” can be looked upon. Hey, if you can’t be trusted with paying back money, maybe you can’t be trusted to pay your rent on time!
This kind of thing happens a lot. How much trust you have, means a lot, and for more than just money.
**Personal Story**
When I first got out of college, I had no credit. I had never borrowed money from anyone, so nobody trusted me.
I went into a bank, and asked for a personal loan. They said, “You have no credit, but we’ll loan you $100 for three months”. They took a risk. It was a very small amount. I didn’t even need the money.
I took that money, and put it in a box under my bed, and didn’t touch the money. I didn’t spend it. I didn’t use it at all.
And after three months, I paid it back. Now I’ve established some credit.
And then I asked the same bank for a larger loan, $500. And I did the same thing again, I did not touch the money, and I paid it back, and my credit grew
If you can find a bank to take a risk on you, you can establish credit the same way.
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