Good credit is the ticket to the good life.
Whether you're applying for a mortgage, a car loan, student loans or even a job, in many cases the corresponding organization will check your credit score and go from there. If you don't measure up, your choices might range from a loan with a sky-high interest rate to nothing at all.
"In today's world, there's a lot of people whose finances are not up to par," says Emilio L. Carrasquillo, neighborhood director at the Home Ownership Educational Center in Back of the Yards, a program run by Neighborhood Housing Services of Chicago. "It's very important to have good credit. It's more important than before, probably. And yet a lot of people don't have the understanding of credit bureaus and how to maintain good credit."
Maintaining good credit provides a number of benefits, says Ruth Contreras-DiDiana, director of Greater Southwest Development Corp. "You can obtain loans and credit at a lower interest rate," she says. Good credit helps you get hired, "especially in jobs that involve anything with finance or money. It's easier to lease or rent property, open a checking account, establish utility service without any downpayment or deposits required, and also pay insurance for auto or housing a much lower rate."
Credit Scores 101
Generally speaking, credit scores between 620 and 680 are considered marginally good--one can get a mortgage but probably not with conventional financing--680 to 750 are solid, and anything above 750 is outstanding, says Peter Nelson, pre-purchasing coordinator at Northside Community Development Corp.
"You're essentially telling the lending industry what your consumer practices are, with your credit score," he says. "Keeping it in a certain range is important, the higher the better. .... If somebody is 620 to 680, they can still get financing as long as other things are OK--they don't have collections, and they haven't filed for bankruptcy or been in foreclosure in the past."
Julio Rodriguez, director of financial education at Northwest Side Housing Center, says even those with reasonably good credit scores could still stand to improve them. He recalls a client with a credit score of about 680 or 690 who wanted to refinance their home from a 4.9 percent interest rate to 3 percent, but they needed a 720 score.
"They would have been able to save $150 to $200 per month on the monthly payment," he says. "It really does help to facilitate your experience as a consumer, with how much you have to pay out of pocket. You help yourself in the long run avoid costly fees that you would have to pay with bad credit." Those can include payday lenders, Rodriguez adds, who charge interest of up to 300 percent.
How to Maintain Good Credit
The most important building block to maintaining good credit in the first place is to pay your loan installments and credit card bills on time, Contreras-DiDiana says. "If you fall behind, it's reported to the credit bureau, and you see a reduction in score," she says. "The trick then is to pay it off as quickly as possible, or pay the balance off on a monthly basis."
Back of the Yards offers financial coaches to help people plan for and achieve their credit goals, Carrasquillo says. To keep credit strong in the first place, homeowners take a look at housing costs, which ideally should be less than one-third of a household's total budget, and work on cutting back elsewhere as needed, whether on utility bills, insurance or other expenditures.
Financial coaches also help homeowners build a mix of debt, and hopefully not all revolving debt, Carrasquillo says. Three credit cards is about the right number to show that you're able to pay them off without looking like you're overdrawn, he says, but any such cards should be regularly used. "You need to have some type of activity," he adds. "Without activity, your credit score is going to slowly drop. It's all about understanding how the system works."
"It's important to use your card," Contreras-DiDiana agrees. "If it just sits there and isn't used, it's not going to improve your score."
Rodriguez suggests a keeping healthy mixture of different types of debt--student loan, car loan, credit cards, etc.--and being proactive about tracking them and paying them off. "It's easy to go into debt. If you don't have the money, you shouldn't use it," he says. "Look at your finances, look at your budget, keep your balances low and make your payments on time."
Nelson echoes the thoughts about a healthy mix and paying your credit card on time, although he says that doesn't necessarily have to mean the full amount every time. "Just make at least the minimum payment on time," he says. Having a mix "shows that you are aware of your financial situation and can pay different kinds of debts on time."
How to Rebuild Your Credit
When faced with clients who have fallen behind significantly on their payments and need to rebuild credit, Greater Southwest assigns them to a financial coach who helps them put together an organized debt payoff plan, says Contreras-DiDiana says. That person first reviews their credit report to see if, by chance, one of the credit bureaus has made a mistake--and if so, to dispute the error, to which the bureau must reply within 30 days.
"If there are outstanding balances owed, the next step is to contact the creditor or the collection agency to try to pay them down," she says. "You can't ignore them. They don't go away. ... Sitting down with a financial coach is extremely important. They can set a budget to do the pay-down. At the end of the day, it really comes down to budget."
Rodriguez suggests starting your credit rebuild with a small secured loan debt or secured credit card. Homeowners usually pay a small fee for these, but partly for that reason they're easier to obtain than other types of credit, and with gradual repayment one can begin to re-establish credit credibility.
Nelson also suggests a secured credit card tied to a cash deposit or other form of collateral. "If you go over, or you do not pay, or you run into trouble, whatever amount you're delinquent on, the bank will just remove that from the deposit," he says. "Folks can use that as their credit card, and once they're confident they can move on to other credit. You close that account since you have a good score again, and that can help secure another credit card with possibly a higher limit and a lower interest rate."
It helps your credit score the most to use about 30 percent of your available credit, Nelson says. A bit higher than that, "It's not really hurting you, but it's not really helping you," he says. "And once it shows up that your ratio is high, it will adversely affect your score because you're not allowing yourself a whole lot of wiggle room. You're maxing it out and have less cushion. Obviously life happens--emergencies happen--so it's important for folks to keep in mind that leaving yourself some cushion and some security is a best practice."