The University of Florida Institute of Food and Agricultural Sciences is committed to helping people – from producers to consumers – weather the storm and is providing research-based information to help everyone through this costly climate with the Find Your Frugal series times to help.
This week, a resource development expert shares five tips for the UF/IFAS community on how to get credit and stay healthy and in control in this economic environment.
As the Federal Reserve fights inflation, consumers and businesses are looking for ways to manage their creditworthiness, get the most out of their credit, and keep it strong and manageable.
“The goal is to earn interest, not pay it,” said Carol Roberts, one of several UF/IFAS representatives statewide who specializes in community resource development. “Now is the time to pay off your loan debt and put that monthly payment into an emergency fund instead.”
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Here, Roberts offers five insights to borrow responsibly and keep it healthy in the current lending industry.
1. Know that you have a credit score and how it affects your life.
Even if you don’t apply for a loan or credit card, your credit score is used by others to make decisions about you. These “others” include auto insurers and employers. It’s important to understand the five factors that affect your credit score.
The biggest factor is your loan repayment profile. That equates to how well you pay off your credit accounts. If you are more than 30 days late with a payment on a credit account, this will be reported to the Schufa, which will negatively affect your credit score. It is important to show that you pay on time.
Another big part of your score is how much you currently owe relative to how much you have access to credit. This is known as your debt-to-credit ratio. It’s optimal to use about 30% of your revolving credit limits together. The score also includes the age of each of your credit accounts and the types of credit you use. Find out about revolving and installment accounts. Conclusion: Keep an eye on your credit management.
2. Know your score before applying for a loan.
Your ability to qualify for a loan is largely based on your credit rating and income. You must provide this when applying for a loan or credit card. In some cases, you may also be required to disclose other assets and monthly expenses. If your score is below the lender’s threshold, they may deny you the loan or give you a higher interest rate or Annual Percentage Rate (APR).
A higher interest rate increases the cost of borrowing. The better your credit score, the lower the interest rate you can qualify for from the creditor. In this case, the loan repayment may cost less.
3. What should be considered when building up or converting a loan?
When building or rebuilding credit, it’s often easier to qualify for a business-specific charge card than a mainstream credit card. If you have a gas station or clothing store credit card, use that card to make a small dollar purchase once a month and pay the bill as soon as you receive the statement.
Make sure the purchase is low enough to ensure you can pay for it in full. This avoids interest costs when building up your credit. Be sure to pay on time for the full effect and avoid late fees, which can also affect your credit score.
4. It’s up to you to understand your credit limits.
Financial institutions make money from your credit usage. They often lure the borrower into favorable loan terms, higher credit limits, and more. If you know you’re an impulse giver, don’t take the cards with you when you go shopping.
Better yet, load a gift card with the amount you want to spend and use that to avoid overspending and using your credit limit. Credit is a convenience that allows us to spend tomorrow’s money today for a fee. The problem is that you need tomorrow’s money for tomorrow’s expenses. This can lead you to overstretch your budget and rely on credit. Create a spending plan and plan your credit usage to avoid overextending.
5. If you’re over your balance – be proactive to cash it out.
Start by contacting your creditors and work with them to explore your options. If they don’t hear from you, they can’t help you. Remember that it is in their best interest to help you in any way they can to pay their bill and not default.
Depending on the situation causing the hardship, they may allow you to skip a payment, revise a loan, or freeze an account to avoid adding more fees to the balance. If the situation has gotten to the point of involving a collection agency, know your rights under the Fair Debt Collection Practices Act and consider enlisting the help of a reputable credit counselor.
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