Does Your Credit Score Even Matter During A Global Pandemic?

MOMMY TALKS PODCAST Episode 11
  • MOMMY TALKS PODCAST

Six months after COVID-19 shook the world, with more than 30 million cases and one million deaths, what was initially reported on December 31, 2019 as a small scale epidemic within China is now being viewed as a global catastrophe. After the disaster of 9/11 and the financial crisis of 2008, this is the third biggest economic shock in the last twenty years that has hit us on a global level. Official surveys and data outputs reveal that there has been a significant halt in economic activity while also signifying that this deadly virus has caused a massive drop in the U.S. GDP (Gross domestic product) by the end of the second quarter. With everyone, including businesses, being affected by the impact of the coronavirus, one must ask themselves does having a good credit score even really matter right now?

The Importance of Your Credit Score

Even in the midst of Covid-19, one must not forget how essential one’s credit score is for their survival and their advancement on the road to personal financial success, because just as we have been able to survive previous pandemics, it is expected that we are on the road to recovery from this one as well. A lot of families fail to realize how much their credit score affects their standard of living today. Credit scores are decision-making tools that lenders use to help them anticipate how likely you are to repay your loan on time. Credit scores are also sometimes called risk scores because they help lenders assess the risk that you won't be able to repay the debt as agreed.

A person with a credit score below what is considered a “good” credit score must learn to build it, defend it, and take advantage of it. A mother with poor credit could be spending $800 more monthly in interest alone for the same lifestyle as someone with great credit. In fact, at this rate she will spend $288,000 more over a 30 year span for the exact same lifestyle as a mother with great credit. However, if that same mother didn't have bad credit and could invest that $800 monthly at an 8% annual rate of return for 30 years, the total value would end up being $1,192,287. Sure, the small figures of money might not seem to be substantial in the beginning, but the yearly accumulation can exceed six figures and that can either be earnings for your family, or interest that your family pays to someone else. After all, when you have great credit, your family gets to enjoy the pleasures of a great lifestyle quicker and for much less than a family with poor credit.

A FICO Score of 670 or above is considered a good credit score, while a score of 800 or above is considered exceptional. With good or exceptional scores, you will acquire the best rates and terms from lenders since they will be competing for your business. Instead of being reluctant to be asked to pay too much on loans, your credit score gives you the independence of choosing your lenders and getting a price that works in your favor.

Let’s be honest, everyone is checking your credit—from applying for a job, renting a new apartment, purchasing the newest cell phone with the best cell phone provider, even when applying for utilities—and that hasn’t stopped, even with a global pandemic happening. This information is used to decide whether to qualify you for their services and if so how much they will charge based on your risk for their company.

How to Improve Your Credit Score

First and foremost, the way to start improving your credit is by understanding your debt. Financial history and math have proven that debt is one of the biggest obstacles that 87% of American families face when attempting to attain financial success. In order to understand your debt, you’ll need to take the time to review each of your credit reports and your credit score associated with each of those reports. The FICO score is the most commonly used credit score when applying for credit or a loan. FICO often makes changes to its credit score model to make it a better reflection of how creditworthy an individual is. As a result, there are currently more than 50 FICO credit score models that are used for different types of debt. A different version of your FICO credit score is used for a mortgage, auto loan, even medical debt. The information that is listed on your credit report determines your credit score and based on this combined information, determines your next steps, but before you move forward you want to understand that your credit score is being calculated by five factors:

Payment History (35% of your Credit Score)

Lenders are most concerned with whether or not you pay your bills. The best indicator of this is how you’ve paid your bills in the past. A payment isn’t considered late until 30 days past the due date. No matter how late the payment once considered late, its effect can decrease your score. If you have 30 day or 60 day late payments that are an infrequent occurrence, they shouldn't cause lasting damage to your credit score unless they are within the last two years or so, or occur on a regular basis. In this case, the fact that you are habitually late with your payments can cause long-term damage to your credit scores. Once you have a 90 day late payment reflected on your credit, even just once, your credit score will be damaged up to seven years. From a scoring perspective, a single 90 day late payment is as damaging to your credit scores as a bankruptcy filing, a tax lien, a collection, a judgment, even a repossession.

Debt Level (30% of your Credit Score)

The amount of debt you have in comparison to your credit limits is known as credit utilization. The higher your credit utilization—the closer you are to your limits—which means the lower your credit score will be. As long as you’re not being charged to keep an unused account, it’s the best practice to keep it active regardless of the usage. It can help decrease your overall utilization ratio. Surprisingly 1% - 9% is the ideal credit utilization; using this amount of your credit is the fastest way to help improve your score, assuming that you make all your payments on time and are otherwise responsible. This is contrary to the popular belief that one should keep their credit utilization at 30%. In fact, the more accounts you have with credit utilization at 30% or more, the worse it is for your credit score.

Length of Credit History (15% of your Credit Score)

Having a longer credit history is favorable because it gives more information about your spending habits. It’s good practice to leave open the positive accounts that you’ve had for the longest time, for as long as possible. The truth is that credit affects your life as soon as you become an adult and continues to do so for the rest of your life. That's why 18, or younger, is a good age to start building credit, which can be done primarily with the assistance of the child’s parents. As long as the parents have good credit or are working on rebuilding their credit they can add their child to accounts as an authorized user. Most cards allow authorized users younger than 18; some have age minimums, while others don't.

Inquiries (10% of your Credit Score)

Each time you apply for credit, an inquiry is added to your credit report. Too many applications for credit can mean that you are taking on a lot of debt or that you are in some kind of financial trouble. While inquiries can remain on your credit report for two years, your credit score calculation only considers those made within the last year.

Mix of Credit (10% of your Credit Score)

Having different kinds of accounts is favorable because it shows that you have experience managing a mix of credit. This isn’t a significant factor in your credit score unless you don’t have much other information on which to base your score. Open new accounts as you need them, not to simply have what seems like a better mix of credit.

Once you understand what your credit score is made of, the next step to improving your credit score is to analyze each of your credit reports. Why should you review each report? Creditors can pick and choose which credit reporting agency they want to report to. Some will report to all three, but many won’t. You may find that what is included on one report isn’t on another. The reports will have different information because it's a voluntary system, and creditors subscribe to whichever agency they want—if any at all.

The key to improving your credit is staying organized. While going through each of your credit reports, you want to insert each item that is affecting your credit score into a spreadsheet to track the information listed as well as when you send out your dispute letters. I suggest that you dispute any and everything affecting your score negatively. This may take a few rounds of dispute letters, but it’s worth the effort.

The older and smaller a collection account, the more likely the collection agency won't bother to verify it when the credit bureau investigates your dispute. It’s a good idea to contact your creditor first, then allow a bit of lead time before you submit the dispute to the reporting agency. By the time the dispute is verified, the creditor will hopefully have corrected the error.

If you are disputing something on your credit report, it's suggested that you write a hand-written letter to each credit agency instead of disputing online. I know, I know, I can hear you screaming at me as I type this. But by disputing online you allow the agencies more time to respond to your dispute than the 30 days allowed. They are required by law to provide you the method of verification used to verify any account on your account since they are reporting it as accurate information. Your first letter should be the Method of Verification letter.

If your attempts to correct an entry are unsuccessful, you can ask the reporting agency to insert a 100-character explanation next to it that explains your side of the story. Under the Fair Credit Reporting Act, the credit bureau is required to solve the problem in a reasonable amount of time, generally 30 days. If you feel that a credit bureau has not responded promptly and fairly to your situation, contact the attorney general of your state or the Consumer Financial Protection Bureau (CFPB) at www.consumerfinance.gov or (855) 411-2372.

One should understand that it took years for you to get where you are, so be patient when rebuilding your credit score because it will take time for you to restore it.

Conclusion

Everyone has a different goal that they want to achieve what they consider to be financial freedom for their family, but ultimately I think it all boils down to basically the same for everyone. We all want to provide our children the best life possible and be able to enjoy every moment of living that life with them. The money that you can save by having a good credit score can help you start to do just that, whether you are interested in starting a new business, revamping your current business, or even investing more towards your retirement. You are able to leverage financially beneficial deals for you and your family by having a higher score.

Life is already expensive enough, don’t make it more costly by having a bad credit score. This number is the key component in your ability to make the larger purchases for your family and must not be taken for granted. It is important that you are open to learning the basic concepts of managing your own credit, so that you can teach those skills to your children.

Otherwise, you’ll find yourself giving someone else control of your family’s livelihood, paying someone—with no exact end date—money that could have been used to actually assist you in correcting your credit, and later, investing in your family and your future.

My goal is to spend as much time offline as humanly possible. I have two little guys that demand my attention outside of work and am aware that you have little ones that are just as demanding as mine are. If we're not connected on Facebook, Instagram, YouTube or Twitter, be sure to find me there. I'm always down to connect and answer any questions, feel free to reach out to me and my team at support@expandingwithasha.com!

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Hi! I'm Asha.

Born and raised in South Carolina, I’m a country girl who’s passionate about making a difference in the world. I’m an obsessive learner who spends time reading, creating, and selling online educational programs for mothers.

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