In these unprecedented times, the pandemic has created an increased sense of urgency for civilians regarding their financial situation and credit. As many people are obsessed with rebuilding, REVOLT aims to help during National Financial Literacy Month. To begin, let’s find out how credit is established.
According to Britannica’s definition, credit is a “…transaction between two parties in which one (creditor or lender) provides money, goods, services or securities in exchange for payment future promised by the other (the debtor or the borrower). These transactions normally include the payment of interest to the lender. Credit can be granted by public or private institutions to finance commercial activities, agricultural operations, consumption or government projects.
Ideally, borrowers strive to pay less interest to their lenders. Yet this process is nuanced, especially for people from low-income backgrounds. Regarding issuing credit beyond credit limits that are not pre-determined, Bankrate records: “Your credit limit is based on your credit history and credit score. In a few cases, a credit card issuer will perform a more in-depth analysis of your credit history, considering why you might be a potential credit risk. One of the factors in how quickly a person can start building their credit deals is how much money they earn. Being paid a living wage increases the likelihood of loan approval, budgeting against existing debt, and building a healthy payment history.
If you are familiar with restorative processes, it should be noted that the importance of financial literacy is often undervalued or completely absent from the curriculum. You’re not alone. When selecting a credit format – like an approved credit card – one way to encourage good credit is to pay down your balances strategically. With credit cards, using less than 30% of your credit limit and making payments later in your billing cycle is favorable to the credit bureaus. “High scores use less than 7%… [So, it is beneficial to] make sure your balance is low… An easy way to do this is to pay multiple times throughout the month,” NerdWallet posted.
Plus, paying your regular 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 how close you are to socioeconomic essentials. Those with a low credit score are in the best position to improve their position quickly. If you’re unsure of your current investment, there are free credit reports available, including Experian, TransUnion, and Equifax. Although there are hundreds of American credit score 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’] companies… FICO uses five main 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] (ten%).”