Aamid rising inflation and high interest rates, credit card use soared between April and June, leaving credit consumers wondering what they can do to improve their credit scores. With the threat of recession in the near term, prompting people to set aside money and prepare for a tough economic period, those still recovering from the pandemic and relying on credit are particularly vulnerable.
“It’s been a huge problem since COVID started, people are getting stretched to the point where they can’t pay bills,” Jason Kaplan, president of The Credit Pros, a credit repair company, told TIME.
The consumer price index, a measure of how expensive goods and services are, had its share the biggest increase this year since 1981, reports the US Department of Labor. Luxury purchases have declined nationally since the start of the pandemic. Last month, Best Buy CEO Corey Barry did declaration for a decline in electronics sales. The number of credit users is growing using credit to pay for household goods and necessitiesas opposed to non-essential or luxury items.
“In an environment where there’s a need for money and resources and a lack of education about what the long-term effects (of low credit ratings) are or even the short-term effects, being financially responsible and budget-minded (is difficult). These are all the problems we have in this country, and they’re compounding,” Kaplan says. “It’s being exacerbated by COVID, by inflation, but it’s a cycle that happens in this country every 15-20 years.”
Why your credit score matters
A credit score is a numerical system that only predicts how likely a person is to pay their bills on time in the next two years, but it affects many aspects of life, according to Kaplan. A low credit score can limit a person’s ability to rent a home, apply for a mortgage, buy a car, have insurance, and even get a job.
“Your credit score is a completely mechanical process. There is a formula, there are a finite number of factors that go into your score. In the big picture, good credit is more important today than it has been in the last 10 years,” Jim Kemmish, president of Sky Blue Credit, a credit repair company, told TIME. “That’s because as interest rates rise, the penalty you’ll pay for bad credit is higher than it used to be.”
Kemmish said employers in some areas now look at credit scores for pre-employment screening, and if employers don’t like what they see — ie. the applicant has a low score or late payment on their credit report – this can affect the person’s ability to find work.
The use of credit is clearly a part of American culture and is embedded in most aspects of society. However, related to this is the lack of financial literacy, which affects economically vulnerable individuals the most, Kaplan explained. He added such legislation as the responsibility for credit card reporting and disclosure (MAP) Act 2009which reduced predatory lending by regulating fees, strengthening consumer disclosures and protecting young consumers, there are still many gaps and people need to be careful.
“We’re in an economic environment here in the United States where people usually get things up front before they can pay for them. Buy now, pay later. In a good way, it’s how America is one of the leading economic countries in the world, where everyone seems to have opportunities to borrow, invest and grow,” says Kaplan. “There are positives and negatives to this.”
How to improve your credit score
Both experts recommend techniques people can use to improve and maintain a high credit score, including paying bills on time — especially if one goes into collection — aiming to use only 20-30% of their credit limit and regularly to check their credit report.
“The majority of your credit score, which is about 35%, is your payment history. My advice above all else is to always pay your bills on time,” Kaplan says. “It doesn’t mean paying a whole bill. There are minimum payments you can make with credit cards or sometimes even services.
Kaplan also said it’s essential to have a well-rounded mix of credits for different purposes.
“The idea is that if you have the right mix of credit, credit card, mortgage, car payments, bank loan, having all of those (suggests) that you’re a well-rounded, successful adult living the right life as far as credit goes rating. You’re less of a risk because you’ve participated in all of these institutions,” Kaplan says.
Some users worry that checking your credit score could have a negative impact, but Kaplan explained that users are allowed to download their scores as much as they want, also known as a soft inquiry. However, when third-party companies pull a user’s score, it’s a tough ask, and a large number of serious inquiries in a limited period can lower your score, so it’s important not to look for loans or new lines of credit too often.
It’s also important to check your credit report frequently to make sure there are no errors, as they are much more common than people think.
“Get all three credit reports. Correct them carefully. If you’re confused, hire a credit repair company to help you figure out what you’re looking at,” Kemmish says. “Look for mistakes. Mistakes can be very costly to your bottom line. If you find something that isn’t yours, if you find an old paid account that’s still reporting a balance, you should dispute it. If you ever had a collection that you paid for, don’t trust the collector to report it as paid. You should monitor your own credit report.
If you ever have a bill that goes into collections, it’s vital that you pay it, but you can try to negotiate the bill for a lower price, especially if it’s an old bill from a few years ago, Kemmish said. Both experts stressed the importance of having an emergency fund for rainy days and trying to save a little money each month, but acknowledged that this is not achievable for everyone and is much more difficult for those living paycheck to paycheck up to salary or are deeply in debt.
“Money in the bank is power. Power to pay your bills on time, Power to cover emergencies that arise, power to know you can take a vacation if you want without building up credit balances,” says Kemmish.
Everyone’s financial situation is different and the most important thing is to be careful how you use credit.
“It’s important for everyone to have compassion for their own situation. “No one should feel guilty about falling behind,” says Kemmish. “Just try to make smart decisions, and when it comes to your credit, the most important thing is to be aware of the connection between your credit score and your life. It’s easy to make the decision to take out that piece of plastic and buy whatever you want, and suddenly cut that out of your ability to get a job and get ahead.”
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