# Building credit is key to financial freedom Published: 2021-06-28 Category: Wealth Creation Category URL: https://wealthtribune.com/category/wealth-creation/ Meta Title: Why Good Credit Is Essential for Wealth Building Meta Description: Learn how good credit can impact your future wealth, investments, and financial stability. Follow expert advice on credit rebuilding and smart financial URL: https://wealthtribune.com/building-credit-is-key-to-financial-freedom/ ![undefined](https://prod.superblogcdn.com/site_cuid_cm5qso2qu002awirgzorggbnl/images/graphicstock-white-piggy-bank-beside-small-green-plant-on-a-pot-with-yellow-wooden-wall-backgroundstso4ubzuz-1737032772871-compressed.jpg) By: Nicholas R. Fernandes-CreditSage Founder Smart Credit Rebuilding People often say they build their wealth by investing early but one thing they leave out is credit. Credit is absolutely important in building wealth. If your student loans aren’t paid off or any debt you owe, it’s going to constantly affect your credit. Your future purchases depend on your credit. Want to invest in real estate? you need good credit! Want to rent a future office for your company, you need good credit! Want to open a credit card and get reward points for your purchases? guess what? you need good credit! Everything you do from the time you turn 18 is dedicated by credit. Having good credit can give you the leverage you need to get ahead in life. Several landlords check your credit to see if you are dependable. Several employers check your credit before hiring you as well, having good credit can be the last straw in why you should get that position compared to other candidates. Making purchases on a credit card gives you the freedom to utilise the bank’s money and gain reward points that can be used to make additional purchases or even go towards your next flight ticket. Before you start investing with your additional funds, pay off all existing debt. You can have thousand dollars in stocks but still owe two thousand dollars in credit card debt, which puts your net worth at negative thousand dollars. Follow the 50/20/20/10 rule, budget and try to live on 50 percent of earned income. The 50 percent should cover your rent/mortgage, monthly expenses, subscriptions,etc. The next 20 percent should be invested in index funds, the other 20 percent should be tucked away in your savings, this money is for future major purchases and the rainy day funds. The rainy day fund is a sum of liquid cash for unforeseen circumstances. The last 10 percent is for riskier investments, like crypto for example. This 10 percent shouldn’t exceed the 10 percent of your monthly income. The main reason is if it completely crashes and you won’t be affected by it but if it pays off then your risk pays off. If your work offers a 401K then, try and max that out first, your 20 percent of safe investments can be counted via your 401K. Your 401K account is money that isn’t taxed and is only taxed if you choose to pull out the money before 59 years of age. That money can be used towards mortgage or medical bills as well so it’s safe. Most companies match your contribution up to a certain amount so take advantage of that. If your company doesn’t offer a 401K, make your investment via a Roth IRA. A Roth IRA is pretty similar to a 401K except you are taxed ahead rather than later. If you have debt, use the 20 percent meant for investment to pay off your debt first before investing, as mentioned above focus on clearing your debt and getting your credit score up. Having bad credit puts you back several steps in building wealth, you get the worst interest rates and will end up paying thousands of dollars more over your lifetime. Knowing how your credit score is calculated is the first step in getting good credit. Here is how your credit score is calculated. -35% is based on payment history -30% is based on amount owed -15% is based on length of credit history -10% is based on types of credit -10% is based on new credit The most important factor in your credit score history is how you pay back the credit you borrowed, that is why we emphasize paying the debt/credit back first before investing. It accounts for 35 percent of your score. The second most important factor that Banks use to judge you as a lender is credit utilization. For example if they lend you 100 dollars , they only want you to use 30 percent of that, which is 30 dollars. Anything more is considered high leverage in their eyes. The third fact which accounts for 15 percent is how long you have a certain type of credit, we suggest never closing your credit cards, even if you don’t use them just keep them active because they help you build credit every month and the longer you have a line of credit offered to you really affects the 15 percent. Ten percent is based on types of credit, if you have a car loan and credit cards and mortgage and you’re paying them off monthly, it shows them you are reliable and more likely to get approved on lower interest rates to refinance your loan or restructure your credit. If you don’t have multiple different types of credit lines, you can always substitute it by having credit lines offered to you from different banks. The last ten percent is based on if you open new lines of credit in a short time, this is to regulate how much time you should spend on getting new lines of credit. You now have the knowledge to start with your wealth building journey with the first hidden step that isn’t mentioned by most wealth experts. Credit is used everywhere and needs to be given more importance, high schools should teach children about credit and taxes to equip them better for adulthood. It’s never too late to learn about your finances, it might feel overwhelming at first but exposing yourself to it as early as you can help you build the future you want. --- This blog is powered by Superblog. Visit https://superblog.ai to know more. ---