Happy Finance FRIYAY! Welcome to the second and perhaps most integral component of our conversation. The purpose of this credit series is to arm ourselves with the education required to leverage the tools placed in front of us. Now I know in the past, many of us (myself included), have struggled with conceptualizing credit. What it means, how to manage it, best practices, etc. This blog post will provide the parameters of credit, tips on managing credit, building or restoring credit as well as tried and true tips to postively impact credit. So let's begin with the basics of credit. Let's get into it!
FICO- short for Fair Issac Corportation, that's right! FICO is a for-profit corporation largely in charge of monitoring credit. FICO scores range from 300-850, a 'Fair' credit rating can range from 540-600 (which is approximately the current credit average), a 'Good' credit rating is from approximately 640-720 (660 is the typical FHA range, while 720 will afford price breaks on things like insurance, HELOCs, etc.) 800 or better is currently the holy grail in terms of credit and is typically attached to at least 8 trade lines, an auto/installment line and a term line such as a mortgage or other collateralized line. To get a better understanding of not only how your score measures up, but what your credit history looks like, I recommend obtaining one free credit report every 12 months from each of the three credit bureaus, Equifax, Experian and Transunion. We commonly see the FICO score attached to our bank account information when we log in. It is important to note that credit scores will vary almost on a daily basis due to several variances, which include statement balance and billing cycle versus the actual statement closing date, but that's a conversation for another day. What's important to note is that your credit score will fluctuate, so please do not get too attached to any one number. It is important to stay within in a range and avidly monitor your credit to ensure that everything that is reported is accurate.
Now let's jump into the five characteristics of credit:
Conditions- are the conditions with which you obtained your credit. Installment, Auto, Collateral, Revolving, etc.
Capacity- the ability to repay the financial institution that has extended a credit offer to you, also expressed as DTI or debt-to-income ratio.
Collateral- may be held in a collateralized savings account to obtain credit or may be extended solely on credit score and history.
Character- expressed by credit history- this tells the financial instruction your 'story' so to speak.
Capital- expressed as reserves, or savings available to you in a liquid form.
Now that we have are armed with the information required to positively impact our credit let's ensure that we are doing everything within our capacity to increase our buying power! We do this by first managing our credit utilization, we are in a conservative credit era due to the fragile state of our economy. Managing credit utilization is directly correlated with the credit line that has been extended. A best practice is to keep the credit utilization down to 30% or less. If an emergency arises that warrants going above that 30% threshold, it is imperative that the balance in full is paid prior to the statement closing date. To break it down: let's say that you have a credit card with a credit line of $1,000, 30% of $1,000 is 300. Best case scenario in the example used to positively impact credit utilization is to ensure that on a monthly basis, no more than $300 is charged to that card. To add an extra boost to positively impact your credit score break your payment down into two payments, one payment before the statement state and one payment prior to the billing cycle date. Both should be listed on the top of your credit card statement. Making two separate payments allows you to bolster your credit score due to the fact that 1.) the balance (amount due) reported to the credit bureaus is significantly reduced, and 2.) when the statement cycle ends a $0 balance will be reported with timely credit payments made. Don't say I never taught ya NOTHING ;)
Pro-tip: Set up one of your utilities on auto-pay for your credit card, then add that utility payment to Experian's BOOST which allows you to leverage consistent utilitiy bill payments in enhancing your credit score. This way when the card is paid off in full monthly, you are knocking out two goals with one payment! You are reaping the benefits of timely payments (great for credit history) in addition to leveraging Experian's BOOST by adding your consistent utility bill payment to your credit history.
Okay- so we have so much under out belt now! We have a thorough comprehension of the characteristics of credit, and we are fully aware of the best ways to manage our credit utilization and positively impact your credit score. Now let's talk about establishing and rebuilding credit. Having no credit and bad credit are equally detrimental. No worries, both can be easily remeided. If you are seeking credit for the first time, the likelihood of approval will come from a store card. Think Macy's, Belk, JC Penny, those large national chains with brand recognition. Once you have been able to establish credit with one of the aforementioned department stores, be sure to make a small purchase. Remember to keep your credit utilization in mind. If Macy's extends you a $100 credit limit, spend no more than $30 then pay it off in full. Once you have established a rhythm with the charge card, it is time to strategize for the Visa, Mastercard, AMEX or discover. Start with your local bank where you have established a good relationship with direct deposits and monthly bill payments. Then move on to the digital space with Capital One, Synchrony and Barclays. There are several options, do your research and determine what works best for your credit score and history.
Pro-Tip: Capital One's minimum credit requirement is 500 (with no judgments, liens or deragatory items).
Now that we have established credit, let's talk about rebuilding credit. Rebuilding credit can be timely and challenging but it is very doable. Just like any other investment in self it is absolutely worth it. If you are restoring your credit capacity after a bankruptcy, divorce or just overall bad decisions, follow these steps and watch how quickly your credit will improve.
Obtain Collateralized Credit- in the form of a secured card. This means that you will put a cash down payment to establish your credit line. For example, if you want your credit limit to be $500, you will put down $500 in a secured savings account and the credit card will be issued to you. There are more than likely annual fees affiliated with it. Do your research and determine what works best for you. (I will link a few secured credit card options)
Authorized user/signer- This may a situation where you pay like you weigh! If you don't have access to a friend or family member who is willing to add you to their current trade line that is in good standing with good credit utilization and payment history, there are plenty of people willing to exchange the trade line for a fee.
Follow the credit utilization and payment tips mentioned previously in the post.
WHEW! That was a pretty extensive overview of the characteristics of credit, credit score and credit reports, building and re-establishing credit in addition to credit utilization. As promised, I have linked a few of the top secured credit cards below. Follow me on IG: @__krownmeking and TikTok @krownmekingkmk for more Finance FriYAY tips!