Credit can be tricky. On the one hand, credit gives us opportunities; it gives us access to housing, transportation, even careers. On the other hand, credit can be the thing that holds us back from those very same things.
Millions of Americans feel locked out of financial opportunities, in fact – and they often feel that their credit is what is locking them out. It’s more than a feeling, too. It’s a fact that poor credit (or bad credit or no credit) can reduce our options and increase the cost of borrowing money.
We can’t do life without decent credit
It’s easy to think of credit in terms of non-essentials, like buying a new TV or paying for a vacation. Not only is that point of view dismissive, it’s also simply not a good reflection of just how much we rely on credit.
Shelter, for example, is something everyone needs. Without a decent credit score, it’s incredibly difficult to buy or even rent a home. Not to mention buying or leasing a vehicle, getting life insurance, or financing pretty much anything.
Most Americans – 95%, according to recent Harris Poll research – agree that improving their credit score has a big effect on their personal economic growth. That means not only getting the things they need, but being able to plan ahead and provide for future generations, too. Unfortunately, 57% of Americans say that it’s their credit score that is keeping them from these exact things.
Economic mobility, meet credit mobility
You might be familiar with the term “economic mobility”. Simply put, it’s someone’s ability to change or affect their income, wealth, and economic status.
The hard truth is that right now, there are a lot of things standing in the way for those who would most benefit from economic mobility – from fluctuating inflation to income inequality. That’s why when we talk about economic mobility, we also need to talk about credit mobility.
Credit mobility is someone’s ability to change or affect their creditworthiness and gain access to credit. By making small but smart financial choices, we can improve our credit a bit at a time, making it easier to not just survive, but thrive.
The first step is understanding
If credit is a necessary factor in getting the things we need (shelter, for example), what can we do when our credit score is suffering – or even nonexistent? We can chip away at it, little by little. We can move the needle.
It starts with a solid, basic understanding of how credit works. Credit helps prove your financial ability to borrow money or access goods and services. It’s represented by a number (yep, your credit score) and that number goes up or down depending on your payment behavior and history.
Here are the main factors that affect your credit score:
Payment history accounts for about 35% of your credit score. This factor shows your track record and shows lenders your abilities in the area of repayment.
Also known as your “debt-to-limit ratio”, credit usage makes up about 30% of your credit score. This can give lenders an idea of how you are handling the credit you currently have, and if you are able to handle more.
Age of Credit
Age of credit represents how long you’ve held credit accounts and makes up 15% of your total credit score. The longer your credit history, the more data there is to determine your score. So, if you keep your first lines of credit open, you may maintain a higher score.
Your credit mix is the number and combination of your current credit accounts. A diverse mix can lead to a higher approval rate, leading to even more approval. Credit mix makes up about 10% of your credit score.
Credit inquiries are documented whenever your credit is pulled, and they make up 10% of your credit score. Obviously, a hard pull is necessary to apply for lines of credit, but several credit pulls can be a sign of risk to lenders.
All these factors work together to make up your credit score, and all these factors can be affected by the financial choices you make.
Credit mobility is a process
Steering the ship of your credit is easier said than done. For Americans who are living paycheck to paycheck or are held back by any number of economic barriers, credit mobility is no small task. So, when it comes to building stronger credit, it’s all about doing what you can with what you have.
Knowing is half the battle – knowing why credit is important, knowing what makes up a credit score, knowing your own score and watching it closely. Keeping these things in mind is the first step to gaining more ability to change your creditworthiness.
Credit mobility takes time and patience. But better credit – and every door it unlocks – is within your reach.