Building credit with small purchases and maintaining a good credit score by paying regularly is a great way to build a better future.
TEMPLE, Texas – There’s no easier way to say this, but credit scores matter and no matter yours, they could be used as a reflection, or a first impression so to speak, of who you are. are.
“Credit scores aren’t just for getting credit, a lot of people don’t know that employers use credit to screen applicants or rent apartments,” Lourdes Zuniga, executive director of Financial Health Pathways told 6 News. .
April is Financial Literacy Month and according to Zuniga, Texas ranks 43rd out of 50 in financial literacy, which she thinks we could all improve on.
According to InCharge, a nonprofit debt solutions company, credit scores are based on multiple factors and are a mathematical equation with varying degrees of impact.
Tom Jackson, writing for InCharge, said your score is based on five scoring factors:
- Payment history– Account for 35% of your score. It’s a record of your bills and when you make payments. Three tips: pay. On. Weather.
- Use of credit– 30% of your score. This is the amount of available credit you are using. For example, if you have a $1,000 limit on your card and you spend $500 this month, your usage is 50%. The scoring system likes you to keep credit utilization below 30%.
- Length of credit history– 15%. It just shows how long you’ve been using credit and paying bills. The longer the better, as it gives credit reporting agencies a better idea of how you are running your business.
- Investigations and new credit– ten%. This is when a potential lender checks your credit report. There are two types of surveys. A “meaningful investigation” occurs when a financial institution (banks, credit card companies, mortgage brokers) asks to see your report. These have a negative impact on your score. A “quiet investigation” occurs when there is no real money involved, such as when an employer conducts a background check, a utility company opens a new account, or you simply check by yourself. These requests generally do not affect your score.
- Credit diversification– ten%. Credit comes in many forms, like mortgages, credit cards, car loans, utility bills. The more varied your portfolio, the better. As long as you pay all those bills on time, of course.
Nearly 30% of adults in the United States have bad credit, but it’s not something you can’t fix. Although it takes hard work and discipline, Zuniga said the best thing to do is to stop running away.
“Credit is not a bad thing. Building credit with small purchases and maintaining a good credit score, but paying regularly is a great way to build a better future,” she said.
What about those who don’t have credit, is it better to establish credit and how important is it to do so? John Ulzheimer, an expert in credit reporting, credit scoring, identity theft, writing for badcredit.org, said it’s a personal choice to live off the credit grid.
The Consumer Financial Protection Bureau (CFPB) released a report in 2016 that found 45 million consumers met this definition in 2015.
“If you want to buy a house, a car, or get a credit card one day, you’ll need a credit report and a credit score, unless you plan to pay cash for everything, Ulzheimer wrote online. “And you’ll have to have creditor relations if you want to have credit reports and credit scores.”
Zuniga, who immigrated to the United States 20 years ago, said the best advice she received was to establish her identity with documents and not be invisible to credit.
“I remember buying my first laptop and paying for it to help establish who I was in the United States,” she recalls. “That was the best advice I got then, because later on when you want to buy a house and get a job, believe it or not, people check your credit.”
When it comes to bad credit, Zuniga admitted that some cases are so bad that the only way to get it under control is to limit the damage rather than fix the credit.
“There are situations for some people that we will have to take on a case-by-case basis because there are situations where it is sometimes almost irreparable but I also think, for that, there are good practices where the prepaid cards and stuff like that we can use to contain the damage,” Zuniga said.
One thing to keep in mind too, if you have bad credit is that it doesn’t follow you forever, as credit report entries decline after seven years.
Zuniga said that it is possible to get out of credit score purgatory and that a bad credit score does not mean a financial death sentence forever. His advice for anyone looking to make a small change today, start small.
“Pick up the phone and contact the people you owe and negotiate with them for payment plans, try to make small payments consistently,” she said.
If you want to know your credit score, did you know that you can request it for free once a year? Click here for more information.