In these unprecedented times, the pandemic has created an elevated sense of urgency for civilians regarding their financial and credit standing. As many people are fixated on rebuilding, REVOLT aims to assist during National Financial Literacy Month. For starters, let’s unpack how credit is established.
As defined by Britannica, credit is a “… transaction between two parties in which one (the creditor or lender) supplies money, goods, services, or securities in return for a promised future payment by the other (the debtor or borrower). Such transactions normally include the payment of interest to the lender. Credit may be extended by public or private institutions to finance business activities, agricultural operations, consumer expenditures or government projects.”
Ideally, borrowers strive to pay less interest to their lenders. Still, this process is nuanced, particularly for those of low-income backgrounds. With respect to issuing credit beyond credit limits that are not predetermined, Bankrate logs, “Your credit limit is based on your credit history and credit score. In a few cases, a credit card issuer will do a more in-depth analysis of your credit history, considering any reasons why you might be a potential credit risk.” One factor in how swiftly a person can begin to develop their credit deals with how much money they make. Being paid a livable wage increases the likelihood of loan approvals, budgeting against existing debt, and building a healthy payment history.
If you are familiarizing yourself with restorative processes, it’s worth noting that the significance of financial literacy is often undervalued or missing altogether from educational curriculums. You are not alone. Upon selecting a credit format — such as an approved credit card — one way to encourage good credit is to pay back your balances strategically. With credit cards, using less than 30% of your credit limit and later making payments within your billing cycle reads favorably to credit bureaus. “The highest scorers use less than 7%… [So, it is beneficial to] make sure your balance is low… A simple way to do that is to pay several times throughout the month,” published NerdWallet.
Also, paying your current bills on time helps maintain a favorable credit score. Some may believe that it takes money to make money, but progress can be made on your credit score no matter your proximity to socioeconomic essentials. Those with a low credit score are best positioned to advance their standing quickly. If you are unsure of your current placement, there are free credit reports, including Experian, TransUnion and Equifax. Though there are hundreds of American credit scoring models, the FICO credit score is the most commonly used.
The “How to Increase Your Credit Score” section on Debt.org confirms, “The FICO credit score [accounts for] 90% of [the United States’] businesses … FICO uses five major components in the equation that produces your credit score. Payment history (35% of score) … Amounts owed (30%) … Length of credit history (15%) … Credit mix (10%): FICO likes to see a mix between credit cards, mortgages and auto loans … [and opening] new credit [forms] (10%).”
Evaluating whether or not you can afford a change ahead of diversifying credit options is vital when facing personal finances. Applying for too many credit options against existing credit limits can negatively impact your credit score. Furthermore, it helps to assess which outside expenses influence these scores directly. In addition to credit card fees, healthcare costs, housing-related bills, and expenses surrounding higher education should be of concern. Student loans (federal or private) are most commonly taken out for teenagers and young adults who may not have the means to pay for their undergraduate studies upfront.
More precisely, “About 75% of student loan borrowers took loans to go to two or four-year colleges,” wrote the Brookings Institution. “While federal student loan interest rates are decided by the U.S. Department of Education … private loans are decided by the lender themselves. If you have a high credit score or a cosigner with a high credit score, you may be able to secure fairly low rates on your loans,” compared Nitro College. Additionally, if a student’s legal guardian or parent assists with academic paperwork, such as the Free Application for Federal Student Aid (FAFSA), the lawful descendant is liable for the federal loan’s repayment and probable credit constraints.
Furthermore, the student demographic of 25 and under is also unlikely to comprehend a borrower’s financial terms and are therefore more susceptible to repayment schemes. A recent survey by College Ave Student Loans revealed, “Only about 1 out of 3 (37%) fully understand the financial terms associated with them.” The collective total for American student loan debt has exceeded those surrounding auto loan and credit card debts in the past decade. A lack of preparation for pupils invites long-standing negative repercussions such as lower credit scores, making it difficult for someone who pursued education without resources to achieve stability.
Nonetheless, refinancing options are possible against accruing interest by replacing “one or more student loans with a new loan with better terms from a new private lender,” explained Best Money. While the methods to counter negative impacts on one’s credit score differ, so do the opportunities to file against unrecognized charges with your credit reporting agency. For instance, if your medical insurance covers an essential procedure — and a primary doctor fails to accept your provider — you may need to dispute costs. Ahead of approvals, lenders endeavor to predict the likelihood of being paid any potential loans. Conversely, borrowers should check in to make sure their accounts are being treated equitably.
The American Family Insurance company compiled a list of tips on how to raise your credit score fast, which included these steps: “Report rent and utilities to the credit bureaus… [You can] try registering with Rental Kharma to get your rent and utilities reported to the credit reporting agencies. Apply for a secured loan or a credit-building loan … It works like this: you’ll deposit a few hundred dollars into a secured loan savings account, which acts as collateral on a loan from the lender. [From there, you will] make scheduled payments … [Lastly, you can] cluster your hard credit inquiries … By grouping your mortgage or credit card applications into the same two-week window, credit reporting bureaus will usually view them as a singular inquiry.”
Credit score improvement is one element that brings people steps closer to becoming qualified for a vehicle or home loan — it potentially enables them to experience ownership of their choice. Personal ambitions are unique to an individual, but financial literacy empowers those who begin to master its tools. In the aftermath of coronavirus, the national median income has decreased while the cost of living continues to rise.
The Federal Reserve Board’s Survey of Household Economics and Decision-making (SHED) found that three-fourths of citizens were doing “okay” financially. Even so, its data cited there are “continued financial disparities between communities based on education, race, ethnicity and neighborhood.” In summary, Nick Clements, the co-founder of the personal finance company MagnifyMoney, outlined to MarketWatch that having a favorable credit score “makes your overall life a whole lot cheaper.”
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