Demystifying Credit: FIRST STEPS

We’ve all heard of credit, but for many of us, what it is and how it works remain somewhat of a mystery. The word itself, “credit,” is derived from the Latin credere, meaning “to believe,” and that root gives us a clue into why credit is so important. To financial institutions, your credit indicates how likely you are to repay them. Credit scores function as a measure of how trustworthy, how believable, a borrower appears to a lender. Araceli Diaz, Homeownership Counselor at Spanish Coalition for Housing (SCH) warns that “credit can impact borrowers’ interest rates, buying a house, buying a car, refinancing a home, starting a business, and opening credit cards” –with all these important transactions on the line, knowing a little bit more about how credit works can make a big difference!

The biggest factor that affects your credit score is your record of paying (or not paying) on your existing lines of credit, such as loans or credit cards. “Payment history makes up 35% of how your credit score is calculated, whereas outstanding debt is 30%, credit history is 15%, types of credit is 10%, and new credit is 10%,” Araceli clarifies. The emphasis on payment history shows how trust is important to financial institutions, their idea being that people who have consistently paid their debts will keep doing so. Fortunately, this is also the key to recovering from credit hardships of the past. According to Araceli, the most important thing you can do to improve your credit is to “make payments on time without exceptions.” Managing your existing credit is vital to repairing your credit score, so making sure that credit card, mortgage, car lease, and bill payments are timely and consistent forms the foundation on which you can rebuild.

Another factor that can negatively impact your credit is closing several credit cards at once or attempting to open several credit cards in a short period of time. Whenever you apply for a new line of credit, the lender or creditor runs your credit and it shows up on your credit report as an “inquiry,” which means that they officially asked the credit bureau to see your store. Each individual inquiry makes a fairly small dent, but several inquiries can add up. What’s important to recognize is that credit can be read as a measure of reliability and stability, so both shutting down several cards or opening several new ones can look like lack of planning or intention. Looking at your credit can feel overwhelming and urgent, but deliberately paying on and eventually closing accounts over a period of time can help maintain your credit health in the long run.

There are many factors that can affect your credit for the worse; but that means there are also many factors that can change your credit for the better. Gaining someone’s trust takes time, and so does rebuilding or establishing credit. But don’t be afraid to ask for help –make an appointment at Spanish Coalition for Housing today to talk with a financial literacy counselor about what next steps will be best for you! We have credit experts at all three of our Chicago locations who can help:

North office –1922 N. Pulaski

Pilsen office –1915 S. Blue Island

South Chicago office –9010 S. Commercial

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