Credit . . . how does that word make you feel? That’s a question I ask on a regular basis. A lot of people have differing ideas on the concept of credit. A lot of people think credit is far too difficult. A lot of people think that credit is unfair. I think there’s some merit in all of those cases. I must admit that I was one of the many people who thought of credit and then immediately thought of debt. As I’ve become more familiar with the topic, I’ve realized that credit and debt aren’t the same thing. They are related. Basically, you can’t treat credit any type of way or else you may have to deal with debt . . . credit’s “first cousin.”
So what am I saying? Yes, the topic of credit as a whole can be somewhat deceiving. However we experience the general thought that makes up credit every day. Has someone ever told you or promised you that they were going to do something and didn’t do it? Have you ever given someone a loan? Did everyone you’ve given a loan to pay you back . . . on time? For those people who haven’t paid us back on time, or at all, it will be very difficult for them to get another loan from us again. In some instances, we’ll even tell some of our friends not to lend them anything because they still owe us. These general examples parallel the basics of credit. How likely are you to do what you say you’re going to do?
These five components are used to reflect the answer to that question, as well as make up your credit score:
(35%) Monthly Payment History. Are you paying (at least the minimum payment of) your bills on time?
(30%) Amount Owed. What are you doing with the credit you currently possess? Don’t carry more than 30% of the credit limit on your cards.
(15%) Length of Credit History. Keep accounts open and build a relationship. Cutting up a card and closing the account is not always the answer.
(10%) Types of Credit. Have a mixture of accounts, both installment (end date) and revolving (no end date).
(10%) Inquiries. Only ask for credit when you need it. Saving 15% at your favorite store may not be worth the impact on your credit.
Hopefully this helps us to begin to look at credit with a different lens. Remember that the Financial Coaches at Prosperity Connection are there to help. Reach out and schedule a one-on-one coaching session to dive deep into the credit maze. Trust us, there is light at the end of the tunnel.
By Jaison K.D. McCall, Assistant Director – Education and Financial Capability