The role of credit in your financial journey

Understanding the role of credit in your financial journey is one of the key principles of financial literacy. It can make a considerable difference in your financial success.  Not understanding the importance of credit could lead to incurring high interest debt and a bad credit score. As first gen immigrants, my parents did not deal with credit; therefore, I did not fully understand the concept of credit growing up.

Latinos and credit

As first-generation immigrants my parents were unbanked for many years, which means they did not use banking institutions. According to the FDIC, 14% of Hispanics were unbanked in 2017, compared to 3.0% of whites. And this is an improvement from years before. Coming from Mexico my parents did not entrust financial institutions with their money; additionally, the language barrier further discouraged them from seeking information. Other common reasons that discourage first generation immigrants from seeking credit are fees and social security requirements.

No credit score is almost as bad as having a low credit score

One of the main disadvantages of not having a bank account is the inability to establish a credit score. Lenders assess your ability to repay a loan using your credit score. Like many immigrants when my parents needed money they took part in alternative banking methods. These included family and friend loans or tandas (lending circles). Although these unconventional methods require you to be reliable with money, they do not contribute to your credit score. Eventually my parents found out that having no financial record or credit score is almost as bad as having a bad financial record because lending institutions don’t have history to judge you on.

For me, this meant I had the responsibility of understanding the importance of credit management and a healthy credit score. Credit mismanagement could lead to credit card debt which is considered high interest debt. Which could become burdensome towards accomplishing your financial goals. Additionally, making timely payments towards credit card debt is a large part of what makes your credit card score. Therefore, taking on more credit card debt than you can afford can lead to a low credit score.

The role of credit in your financial journey

A low credit score leads to paying thousands of dollars more over your lifetime for access to credit than you would with a high score. Below are some examples on how maintaining a good credit score can impact your finances:

• Lower interest rates on credit cards and loans: Lower interest reduces the cost of borrowing money and this is especially helpful when it comes to large loans such as mortgages. This is something to consider if one of your long-term goals is becoming a homeowner. This helps you financially because you could use the money you save towards investing instead of paying interest.
• Increases your chances for credit and loan approval at higher limits: Lenders use your credit score to assess your ability to repay loans. As such having a good score shows lenders that you are reliable and decreases their risk when lending to you. This makes it easier for lenders to approve your request for credit and qualifies you for higher amounts.
• Lower car insurance rates: Auto insurers use your credit report to determine your insurance risk so a higher score can mean savings through lower premiums.
• Facilitates approval for renting houses and apartments: Credit scores have become part of the tenant screening process and can affect your chances of getting approved into an apartment.
• No security deposits required on cell-phone plans or utilities: You can avoid paying security deposits on things such as cell-phone plans or utilities by having a good credit score.

Taking control of your credit helps achieve your financial goals

As you can see the role of credit in your financial journey is important and being on top of your credit can be very beneficial to your wallet. Navigating credit was a new concept to me and understanding the many benefits to a healthy credit score encouraged me to be proactive in learning how to control it. In the long term having bad credit or no credit can be costly to your wallet. We’re here to help you take control of this and help you use it effectively to achieve your financial goals. Subscribe to our blog to get updates as we discuss other topics relating credit and debt management.