As the Federal Reserve battles inflation, consumers and businesses are looking at how to keep their credit scores in check, gain the most out of their credit and keep it strong and manageable.
“The goal is to earn interest, not to pay it,” said Carol Roberts, one of several UF/IFAS Extension agents throughout the state specializing in community resource development. “Now is the time to wipe out your credit debt and put that monthly payment into an emergency fund instead.”
Here, Roberts offers five insights to getting credit responsibly and keeping it healthy in the current credit-lending industry.
- Know you have a credit score and how it affects your life. Even when you are not applying for a loan or credit card, your credit score is used by others to make decisions about you. Those “others” include auto insurers and employers. It is important to understand the five factors that impact your credit score. The biggest factor is your credit repayment profile. That equates to how well you pay off your credit accounts.
If you are more than 30 days late paying a credit account, this is reported to the credit bureau, and that negatively impacts your credit score. Showing that you pay on time is important. Another big part of your score is how much you currently owe in relation to how much you have access to borrow. This is known as your debt-to-credit ratio.
Using about 30% of your revolving credit limits combined is optimal. Also factored into the score is the age of each of your credit accounts and the types of credit you’ve used. Know which are revolving versus installment accounts. The bottom line: keep a watchful eye on how you manage your credit.
- Know your score before applying for credit. Your ability to qualify for credit is based largely on your credit score and your income. You will have to report these when applying for a loan or a credit card. In some cases, you may also need to disclose other assets and monthly expenses.
If your score is lower than the lender’s threshold, they can deny you the credit or approve you at a higher interest rate or annual percentage rate (APR). A higher rate raises the cost of borrowing. The higher your credit score, the lower the rate you can qualify for by the creditor. In this case, borrowing can cost less to pay back.
- What to consider when building or rebuilding credit. It is often easier to qualify for a store-specific charge card instead of a major credit card when building or rebuilding credit. If you obtain a credit card for a gas station or a clothing store, use this card to purchase a low dollar amount once a month, then pay the bill in full as soon as you receive the statement.
Make sure the purchase is low enough to ensure that you can pay it in full. This will avoid any interest charges while building your credit. Be sure to pay on time for the full impact and avoid late fees which can also impact your credit score.
- It is up to you to understand your credit limits. Financial institutions make money from your credit use. Often, they will entice the borrower toward easy credit terms, higher credit limits and more. If you know you are an impulse spender, don’t take the cards to go shopping. Better yet, load a gift card with the amount you intend to spend and use that to keep you from overspending and using your credit line.
Credit is a convenience that allows us to spend tomorrow’s money today for a fee. The problem lies when you need tomorrow’s money for tomorrow’s expenses. This can lead to overextending your budget and relying on credit. Create a spending plan and plan your credit usage to avoid overextending.
- If you have overextended your credit – be proactive to pay it off. Start by contacting your creditors and working with them to explore your options. If they don’t hear from you, they can’t help you. Remember, it is in their best interest to help you in some way so you can pay their bill and not default. Depending on the situation causing the hardship, they may allow you to skip a payment, revise a loan or freeze an account to avoid increasing the balance with more fees.
If the situation has gone so far as to include a debt collector, know your rights under the Fair Debt Collection Practices Act and consider seeking the help of a reputable credit counselor. For more information on dealing with debt, check out this video produced by UF/IFAS Extension St. Lucie County.