If you want to start repairing your bad credit score there is an important question you need to ask yourself. Do you belong to the “credit community”? Even if you have a credit score and history, this doesn’t necessarily mean that you are a part of the community.
Credit Community: Who Doesn’t Belong?
Most adults are members of the credit community, except for two types of consumers.
- If you are one of the few adults that doesn’t have a credit history, you are probably finding it difficult to start building one. In order to build a positive history there must be credit for you to use, but it is hard to get approved when you don’t have any for potential lenders to look at. Without a previous history of making loan payments on time, most lenders won’t approve you for a credit card or loan. Since you can’t get approval there won’t be any credit for you to use, and this means that you won’t be able to start repairing your dismal FICO score. It is a frustrating Catch-22 that can be difficult to get out of.
- People that have previously experienced bad luck with their credit aren’t always a part of this community. Due to their mismanagement of their credit cards and bank accounts, they have now decided to strictly use cash. Even though this is not the norm in today’s society, it is still possible to exist without ever needing to use a credit card or take out a loan.
Basically, you will be starting from the beginning and this means it might be more difficult to raise a low credit score.
Credit Communities in the U.S.
The Federal Reserve Bank of New York conducted a study in 2015 that found an estimated 89.2 percent of American adults currently have a credit score and history. This means that they are a part of a credit community.
New Hampshire estimates that 96.4 percent of its population has a credit history, while Arizona only boasts 84.7 percent of its residents with a working credit score. The differing numbers reflect the finances of the region, with stronger economies typically resulting in a higher number of residents with useable credit histories. If the economy continues to grow, the New York Fed also expects to see participation increase in a credit community.
Rebuilding Your Credit Score
This is important to remember if you are trying to repair your credit score. Your credit score is determined by measuring a few metrics that include the age and types of accounts, along with any new credit you might have.
There are 3 other factors that comprise your FICO score, and determine how active you are in the credit community.
Credit utilization ratio
While you don’t want your credit utilization ratio to be too high, not using it at all can be just as damaging. It comprises 30 percent of your score, and most financial advisors recommend only using around 10 percent annually.
If you used more than 10 percent you are not alone.
You can still be a member of the community, and use less credit. This ensures that potential lenders have a strong current history to review, while also demonstrating your ability to manage your finances.
Revolving credit
This refers to credit cards and home equity lines of credit, and your ability to obtain it without having to apply for another loan.
Residents living in northern states typically have higher levels of revolving credit due to a stronger economy. This doesn’t mean that if you live in the southern part of the country you won’t have access to revolving credit, but it might be more difficult if you have a low FICO score. By making the monthly payments and managing your accounts, over time your participation in the credit community can help raise your score and make it easier for you to access credit without having to apply for a loan.
Paying on time
Since 35 percent of your credit score is comprised of your payment history, it is easy to see why it is so important to never miss a due date.
Not only does this indicate a strong credit community, but also consumers’ ability to keep up with their loan payments.
Just by making your loan payments on time can raise your credit score a few points, and help build a positive history that can increase your chances of being approved for an auto loan or mortgage.
Using Credit Has Its Advantages
There are not any fees, dues or other extra costs associated with being a member of a credit community. All you have to do to join is to occasionally use credit instead of cash when you make a purchase or pay a bill. Even if you hold several credit cards, if you don’t use them you still aren’t a part of the community.
While it is important for you to be responsible with your credit, if it is used correctly it does have advantages. It can help raise your score, build a strong history and significantly improve your chances of being approved for a loan with a low interest rate the next time you need to apply.
If you have any questions about your participation in a credit community and how it can help you rebuild your history and FICO score, it is always advisable to speak with a qualified financial officer.