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Learning to manage your finances is crucial in achieving major life milestones down the road.
Buying a car or taking out a mortgage on your first home requires having a good amount of savings stored away and a healthy credit score.
But just as important as understanding what you need to reach these milestones is knowing how certain events do or don't affect your credit once you get there.
According to Rod Griffin, senior director of public education and advocacy for Experian (one of the three main credit bureaus), there are five common life milestones that people often misunderstand just how they can either impact or not impact their credit:
- Graduating from college
- Sharing your first apartment with a roommate
- Starting a business
- Married, and getting divorced
Wherever you are on your financial journey, take a moment to recognize how the current situation you are in (or may be in soon) plays a role in your credit. Below, CNBC Select breaks down these five life milestones.
Where you went to school and what degree you did or didn't receive won't be a factor in whether you can access credit.
Since only debt-related information is tracked in credit reports (your loans, credit cards, payment history, any bankruptcies), your education level is not part of your credit report and it has no bearing on your credit score.
The student loans you took out to fund your way through college, however, do have an impact. And as long as your name is on the account, they can actually help you begin to establish credit, Griffin says. In addition to increasing the average age of your credit accounts, student loans act as an installment loan that can boost your credit mix.
As with all credit products, whether these student loans will hurt or help your credit score depends on how you manage them. Making your loan payments on time and in full every month will build a history of on-time payments and show future lenders that you can pay back what you borrow.
Having a roommate certainly comes in handy, especially financially. A roommate can substantially cut your living expenses in half, making your monthly bills more manageable. But sharing an apartment can also come with some financial red flags.
"While having a roommate doesn't affect your credit scores directly, there could be indirect damage if they don't uphold their share," Griffin tells CNBC Select.
If your name is on the lease or a utility bill along with your roommate's, any overdue bill can potentially wreck your credit score very quickly. So, if your roommate is late on making their payment to you in order for you to pay the bills on time, it becomes your problem.
Make it an essential step when you first move in with a roommate to talk about how you manage the bills together. Create a spreadsheet to stay organized and set internal deadlines to enable both of you to track your timely payments. And if they aren't already, ask to have your on-time rent, utility and telecom payments reported to the credit bureaus so they help strengthen your payment history on your credit report. (Experian Boost is a free feature that makes this easy.)
While it's ideal to have good credit, entrepreneurs can still start a business, or get a small business loan, with a bad credit score.
"Opportunities can appear at that most unexpected time in your life and becoming a unicorn startup can be a once-in-a-lifetime chance — bad credit shouldn't stop you from pursuing such an opportunity," Griffin says.
If you have less-than-stellar credit, finding a co-signer can help you get approved for a personal loan so that you can finance your small business. But before doing so, there is an immediate way you can improve your chances of getting a loan (and with better terms) through bettering your credit score.
Experian Boost is a free feature that can bump your credit score fast. Users who sign up can get credit for their on-time utility (water, electricity), telecom (cell phone) and streaming bills by adding them to their Experian credit file.
"Establishing a track record of on-time payments and paying off your debt can seriously improve your credit score," Griffin says.
Once your small business is up and running, keep in mind that establishing a business credit history is just as important as your personal credit history. By doing so, "you can separate your personal credit from the business operations," Griffin says.
"Going through a divorce is stressful, emotional and chaotic, and many tend to overlook their credit during the process, which is a big mistake for long-term financial health," Griffin says.
Divorce proceedings don't directly affect credit reports or credit scores. However, the financial issues that are part of the divorce process usually involve joint credit accounts where both parties are involved. These joint accounts largely do have an impact on the two individuals' credit history and credit scores.
"Prior to the divorce, make sure that if you are the primary owner of the joint account, you either remove your spouse from the account or close the account to avoid unaccounted transactions," Griffin says.
Griffin notes that where things can get confusing for separating couples is with the divorce decree. That's the document presented by a court that formally ends a marriage. While the decree may specify who is responsible for which accounts opened during the marriage, it doesn't break the credit card issuers' or lenders' contracts.
"If the spouse responsible under the divorce decree is unable or unwilling to pay, and the lender has not changed the contract, the late payments will still appear on both credit reports and will harm credit scores for both individuals," Griffin says.
Working or not working, your credit score still impacts how you live.
"Good credit scores may have less importance as you age, but can still play a crucial role in living your retirement dream," Griffin says.
Whatever your retirement plans are — a new mortgage on a vacation home or a long-awaited road trip in a new RV — having a low credit score will cost you more and put a dent in your plans.
With a high credit score, you could get a lower down payment on a new home (for a vacation or to downsize) and you would be able to score the best auto insurance rates on that new RV.
"There are also more opportunities and time to travel during retirement, and having good credit can be an important resource when on the road or jetting off to a bucket list locale," Griffin says.
A healthy credit score can help you qualify for the best rewards credit cards, which come with all sorts of perks, such as airline miles and hotel points when you spend, plus fraud protection and 24/7 travel assistance.
While you are enjoying your post-career years, automate your bill payments so that you never miss a due date and maintain your good track record. Have your free Experian Boost account stay open so that any past on-time payments remain on your credit file and sign up for a free credit monitoring service, like CreditWise® from Capital One, to keep tabs on your credit score along the way.
Credit bureaus monitored
TransUnion and Experian
Credit scoring model used
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