NEW YORK – Financial literacy helps lead to good credit, and a strong credit score is critical to financial stability. However, financial literacy often varies within the African American population, leaving many to fall victim to the hardships that come with low credit scores.
Nerdwallet reports: “A good credit history shows potential lenders that you have a track record of repaying borrowed money as agreed. That can reassure them that you’re likely to do so in the future and are a desirable customer. A solid credit history can also be important to potential landlords, employers, and, in many states, insurers.”
According to the Fair Isaac Corporation (FICO) credit scoring model, credit scores are rated within five specific categories, being: Poor credit (300-579), fair credit (580-669), good credit (670-739), very good credit (740-799), and excellent credit (800-850).
Financial research shows significant disparities among various racial and ethnic groups. The Urban Institute reported median credit scores in majority Black, Hispanic, White, and Native American communities.
Median numbers showed that White and Hispanic communities held the highest median scores. Conversely, Native American and Black communities maintained the lowest scores, with credit scores within Black communities averaging 627 in the ‘Fair’ range.
Benefits of good credit and how to obtain better scores
Good to Excellent credit scores beget optimal results when renting and house-hunting, while even impacting some prospective employers’ decision if they chose to review credit score in the hiring process.
With good credit, people are more likely to be approved by lenders and banks for credit applications (including loans or mortgages, and credit cards), while also likening the offering of lower interest rates, saving a substantial amount of money over time. In addition, good credit can assist with better loan terms, receiving higher credit limits on credit cards, or securing a lower fixed-rate mortgage.
Likewise, a positive credit score can help interested buyers receive better cars and home insurance rates. In addition, car insurance companies will consider credit-based scores to determine monthly premiums in certain states where this practice is allowed.
When a credit score is deemed low, there are often higher premiums.
A strong credit score is largely based on personal credit habits that are imperative to improve for an easier livelihood. Here are a few tips on what habits to adopt to ascend into the good to excellent credit score range:
Pay bills on time: Your payment history makes up roughly 35% of your credit score, making your credit card due dates all the more imperative to adhere to. Missing credit card payments will also bear extremely negative effects on your credit score.
Managing your credit history responsibly: A credit report only keeps track of active credit accounts, which is why it negatively impacts your credit score to close old credit cards. Closing an old credit account shortens your credit history and adversely affects your score.
Credit utilization: Your credit utilization ratio reflects the amount of available credit that is being used. Under this circumstance, it is suggested to use below 30% of your available credit to maintain a strong credit score. For example, if you have $6,000 in available credit, it is best to not exceed $1,800 in your overall card balances.
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