For those wallowing in the dark abyss of bad credit, the pathway to a debt- and worry-free life is so covered in unpaid bills and mounting receipts, it’s hard to see a way out. Just know this: It’s never too late to regain your credit-worthy status.
Quinn Riley, financial education manager at the Chicago Urban League, reaches out to debt-ridden adults through our partnerships with churches, professional associations and substance abuse centers to teach them about financial literacy.
See what Quinn has to say about regaining your credit-worthiness and breaking bad habits that robs us of wealth. Cheryle: How important is your credit card rating to your overall credit score? Quinn: Thirty-five percent of your credit score is based on on-time payments. The averse affect will come if you shut a card down and you don’t have other credit card regular payments you’re making regularly. No credit is bad credit, too.
Having a credit card and paying on it regularly gives you a positive credit history, provided you’re not above 50 percent of the limit. Going beyond 50 percent of the limit tends to reduce your FICA score by 2 to 3 points. If you’re 50 percent and under on your card and you’ve had it for at least 18 to 36 months, it can benefit your score. Q: What about credit card offers people receive in the mail? Are some better than others?
A: Read the fine print. A lot of the new credit card offers will put you in debt instantly. There’s one particular brand that offers $200 to $500 of instant credit, but the activation fee can be as high as $100, with an annual user fee of $50 to $75. They put that on the credit card balance. If you have a $250 credit limit, you’re already at 60 percent of the limit. If you decide to go with one of those credit cards, be sure to pay off the total amount of the fees they tack on the next month so that you’re not caring a debt that didn’t come from a purchase.
Cheryle: What are the pros and cons of transferring balances to interest-free cards? Quinn: One advantage, obviously, is reducing the interest rate. If you’re paying $100 a month minimum and you transfer to a lower interest rate, continue to pay the $100. The con would be that many of those offers are only good for 60 to 90 days and then it goes back to the typical 15 to 20 percent Annual Percentage Rate.
Cheryle: African Americans tend to suffer more greatly than others due to bad credit ratings. What’s lacking in our community?
Quinn: The one key thing that gets many of us in trouble is a lack of budgeting. And so many of us find ourselves borrowing funds for regular daily expenses, and that sometimes leads to high interest and even predatory lending.
Cheryle: So, how do people break bad spending habits? Quinn: What I teach is the envelope test. For 30 days, you make certain you get a receipt for every purchase you make. At the end of 30 days, pull out all the receipts. It’s a strong revelation about where your money is going.
You’ll find there are so many frivolous purchases that are not prudent to wealth development. If you only stopped doing those things and put the money into a savings account, many of the emergencies that pop up for all of us can be taken care of with those savings. So when car breaks down, you don’t have to go out and put it onto a credit card. Cheryle: How do you go from bad credit to good credit?
Quinn: No. 1: Get all of your credit reports from every major credit depository in the country four times a year. The largest ones are Experian, Equifax and Trans Union. Make sure the information on each report is synonymous with the others. There are services on line that allow you to see your score perpetually. Myfico.com is one of them.
No. 2: Check to see if there are any liens or legal items on your credit report. If there are, you want to make sure they are yours. There’s a lot of identity fraud and theft happening today. Cheryle: Any advice for cutting corners in the current economy?
Quinn: Coupons. One of the largest expenses that any household has is groceries. Cut back on chips and sodas and perishable items. Start looking at bargain brands and ways to buy in bulk. That saves a lot of money right there.
Take a breakfast or lunch to work. And save all of your loose change in a digital bank. The container holds up to $800. Open up a savings account and every month deposit your loose change. Every December, take that savings account and put it into a growth mutual fund.
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