Credit 101

Trying to figure out credit can feel like a fever dream “Is this real? How does it work? Mama, can I please have more sopitas?” But it doesn’t have to be that kind of a nightmare, when used correctly, it can actually be a dream come true.

Excellent credit can open up many opportunities in our lives, from everyday things like buying groceries and toiletries, to large life decisions like starting a business or moving into a new home.

So what is credit? What is a credit score? And what makes a good credit score, well, a good credit score? 

Here, hold my hand, and let’s walk through it all together. *Cue harp music*

For starters, credit is described by the Experian credit bureau, one of the three main credit bureaus, as “the ability to borrow money or access goods and services with the understanding that you’ll pay it back later.” 

In other words, credit grants consumers an IOU (I owe you) agreement between them and their credit card company. Meaning if you’re at Target buying the last toilet paper roll and don’t have exact change, your credit card company will take care of it, and you can pay them back. Because who keeps exactly ninety five cents on them at all times?

You can build credit by purchasing goods and services with your credit card. By paying your credit card bill off regularly and on time, you can increase your credit score. 

Your credit score is a number used by the three major credit bureaus to determine how trustworthy you are as a consumer. In a nutshell: the higher the number, the better you’ve been at paying things off on time. It’s almost like your financial resume condensed down into a number. 

But, doing things like maxing out your credit card on large purchases, or failing to make payments on time, will not only grow your debt headache, it’ll also reflect negatively on your credit score. So be careful. Credit cards are important, but they can also be tricky! 

As Tio Ben told El Spiderman, “with great poderes come great responsabilidades.”

Pues why does good credit matter, y porque lo necesito?

Well, good credit tells a landlord, a car salesman, or a bank that you are reliable and have a reputation for paying back your loans and repayments in a timely manner. While bad credit tells them that you are untrustworthy and not reliable. 

Is this generalization true? Not always. Oftentimes, individuals are not able to pay back debt due to a sudden job loss, family issues, or a million other factors that were out of their control. Sometimes credit card companies take that into account and can work with you if you communicate with them, but it’s not always the case. 

Okay, well how do I get good credit? 

You can start to establish good credit by getting a credit card. Once you are approved for a credit card, you can begin to build your credit. But be sure that before you go credit-card-crazy, that you can afford to pay back whatever you purchase. If the funds are not in your checking account, then mijita, you can’t afford it. I like to think that when you pay your credit card on time, you are the hero of your own story. While credit card companies aren’t hoping that you fail, they do benefit from late fees and interest when you don’t pay on time. So what’s the best way to stick it to the villainous Late Fee Monster?  Pay that credit card purchase off as fast as a laser beam. It’s your own small (but important) act of heroism. 

Wow, good to know. So how about FICO? Quien es? O que es? 

Investopedia defines a FICO score (credit score) as the sum of your credit history, number of open accounts, levels of debt, and repayment history. Lenders will check your total score to figure out whether they prove you to be trustworthy enough to do business or exchange goods and services with you. These scores can range from 300 to 850 with 850 being the best credit score that you can have. Here’s a breakdown: 

Excelente: 800 – 850 

Muy Bien: 740 – 799

Mas o Menos: 670 – 739 

Cuidate: 580 – 669 

Pues, no mijx: 300 – 579 

FICO stands for the Fair Isaac Corporation. It’s an analytics software company that was founded in 1956 by an engineer and mathematician. They calculate your credit score and make it easy for you and for lenders to view the current status of your score. 

But my credit is bad! How can I fix it? 

Yes, it’s possible, but we need to make a plan. Primero, pay your bills on time. Investopedia estimates that it will take up to six months of timely payments to raise your credit score. Start paying off your debts with different methods like the Snowball or the Avalanche methods. 

The Snowball Effect 

The snowball effect is a strategy where you pay your smallest debt and work your way up to the largest debt regardless of the interest rate. This method is great for those who owe money across multiple credit cards or student loans. 

The Avalanche Effect 

The avalanche effect is the exact opposite. You pay off debt with the highest interest rate and work your way down to the lowest interest rate. 

Sometimes, bad credit may feel like you keep running into a brick wall, but trust us, with a little bit of discipline and a good action plan sí se puede! Good credit is worth it.

Credit is important and good credit is going to help you with big decisions in your life. Don’t let your credit weigh you down, work on it, strengthen it, and let it be the thing that takes you on a whirlwind of endless possibilities.