So many people talk about the need for us to build our Black wealth, but so few members of the community are talking about how to do that.
And for the few who are talking about Black wealth, few of them actually have it or know how its built!
Here is what everyone is missing: there can be no collective Black wealth unless you are wealthy.
I’m talking about you.
What is a nation but a collection of individuals?
So if you are complaining about Black wealth – or a lack thereof – and you aren’t wealthy yourself – you need to get right.
Here are some reasons why we have the worst credit scores in the United States, and how I personally changed that.
We Dont Understand The Relationship Between Credit And Black Wealth
Some people will try to tell you that credit has nothing to do with Black wealth.
Thats bull and there are three reasons why:
Credit allows you to acquire wealth building assets faster.
Lets say you realize that now is the perfect time to buy a piece of rental property. You do your due diligence and find a property that fits your investment strategy.
The property costs $200,000. You dont have $200,000.
You can spend 10 years saving up 200 stacks (which would be stupid), or you can get some leverage, acquire the asset, and start cash flowing.
Credit can also help you acquire assets for your side hustle – a good look on your balance sheets and potentially increasing your profits.
Having good credit saves you money.
Did you know that your credit score can impact how much you pay for car insurance? ConsumerReports.org writes:
…if [insurance companies] think that your credit isn’t up to their highest standard, they will charge you more, even if you have never had an accident, our price data show…
The increase in your premium can be significant. Our single drivers who had merely good scores paid $68 to $526 more per year, on average, than similar drivers with the best scores, depending on the state they called home.
And your credit score could have more of an impact on your premium price than any other factor. For our single drivers in Kansas, for instance, one moving violation would increase their premium by $122 per year, on average. But a [credit] score that was considered just good would boost it by $233, even if they had a flawless driving record. A poor credit score could add $1,301 to their premium, on average.
In addition to car insurance, having good credit can save you fees and the cost of getting loans and new lines of credit.
For instance,if you had a score of 659, you could get a 30-year mortgage at 5.3% at today’s rates. But if you raised your score to 680, that same loan drops down to just 4.7%.
That’s about $950 a year less in interest, or about $28,000 that you save over the life of the loan.
All that money you save by having good credit can be used to acquire more assets, thus increasing your wealth.
Having bad credit makes you mentally, physically, and financially vulnerable.
I dont need to tell you that money problems can have a negative impact on your health. More stress leads to more diseases like high blood pressure, higher medical bills, and an increased chance you will try to self medicate with drugs and alcohol.
Bad credit can kill your spirit, too. From Money.com:
A recently released study shows that people with credit card debt and overdue bills are much more likely to experience symptoms of depression than those who don’t have such debts, particularly if they are near retirement, unmarried or less educated. The more short-term debt a person had, the more frequently they reported feeling those symptoms. – The Scary Link Between Credit Card Debt and Depression
And if you are seriously in debt, when lenders come calling for payments that you cant make, you can lose the assets you worked hard for.
Some lenders can garnish your wages, take your home, and put tax liens on your assets.
All of these have a negative impact on Black wealth.
So if you understand how important your credit is to building Black wealth, take some time to understand how your credit score works. Once you understand the formula then you understand where to put the bulk of your efforts.
You dont need to be a genius, and the breakdown is pretty simple, so dont skip over the next section.
We Dont Know How To Clean Up Our Credit The Right Way
Most people online will give you stupid advice like this:
- Buy a fill in the blank letter and mail it to credit reporting agencies pretending that a debt isnt yours.
- Call up companies and beg or demand them to remove negative items they have reported on you
- Pay off your collections accounts
- Pay somebody to do all this for you
I bought into filling out letters and sending them to creditors begging them to remove the accounts. I did everything everyone told me to: I sent in letters via certified mail. I claimed the debt want mine. I offered to pay the debt if they would remove the account from my report. And I got……Nothing.
These tactics will cost you time, money, and wont get you the results you are looking for. But of all the above advice, the last thing you should try to do is pay someone to fix your credit!
Why You Should Not Pay Someone To Fix Your Credit
I believe in saving as much time as possible across as many areas of life as possible, but this is something you should do on your own for a few reasons:
You Are Going To Get Overcharged.
‘Credit coaches’ will charge you a premium on the cost of buying your credit reports, opening new lines of credit, and notarizing and mailing out letters.
And most of these processes are outsourced to other people anyway, adding on to your cost. And on top of that, they will charge you for their time.
All that, and there are no guarantees that they will get you results.
I know so-called financial planners will try to discredit this post since it will cost them business, but it will cost you much less to do all this yourself.
The money you save can be used to keep your payments current, open a new line of credit, or outsource on your own.
You Need To Know Whats Going On With Your Money
There is a saying in the professional world that goes like this:
What gets measured gets managed.
In other words, you cant manage anything unless you measure it. For example:
- By weighing yourself regularly – measuring your weight – you know if a diet is working and you can make changes.
- By keeping balance sheets – measuring the assets of your business – you know if your actions are making your company more or less valuable
- And by measuring changes to your credit score, you know if your behavior is leading to a higher score.
Doing This Yourself Changes Your Behavior
By having eyes on your finances – and that means shining light on the ugly parts of your spending behavior – you are actively changing the behavior that led to bad credit.
If you are smacking yourself on the head for letting accounts become delinquent, you are less likely to repeat those mistakes in the future.
These behavioral changes are less likely to happen if you just pay someone to work this process for you.
We Dont Understand How Credit Scoring Works
You are looking at legit screenshots of my credit score progress over 2018.
Like everything else in the universe, there is a logical formula that you can follow to see fast results.
I was able to achieve the results above by understanding how my credit score works, focusing my efforts on the factors that had the biggest impact on my score, and having negative items removed from my credit report.
How Credit Scores Work
The first step in boosting your credit is to understand how your credit score works.
Fair Issacs Co. – the company that issues FICO scores – uses 5 criteria to determine your score.
- 35% of your credit score is based on your payment history
- 30% of your credit score is based on your utilization rate
- 15% of your credit score is based on length of history
- 10% of your credit score is based on new credit
- 10% of your credit score is based on types of credit used
Here is why these numbers are important to you: 65% of your score is based on just 2 factors: whether you pay your bills on time and how much of your credit you are using.
Later on, I am going to give you the hacks I used to impact both these numbers.
A Quick Word on Credit Utilization
Theres a formula for credit utilization, and if you understand this formula you can take the right actions that will give you the fastest results. Here is how to calculate your credit utilization rate:
1. First add all your credit card balances. So lets say you have a balance of $100 on one card and $200 on another. The sum is $300.
2. Then add all the credit limits together. So lets say you have 2 cards – one has a credit limit of $1000 and the other has a limit of $500. The sum would be $1500.
3. Now, divide the total balance by the total credit limit. Using our example, the sum would be $300 $1500. The sum would be 0.2
4. Multiply by 100 to get your percentage. The sum would be 20, or 20%
This gives you a credit utilization of 20%. You want to lower and keep your credit utilization rate under 30% or your score will start to drop.
If your utilization rate is already above 30%, then paying down your balances will have the most positive immediate effect on your credit.
I keep mine below 20% to stay on the safe side. I suggest you do the same.
The Difference Between Vantage Scores and FICO Scores
You might have noticed there are two scoring systems out there – FICO and Vantagescore. While there are others, these are the two scores you want to keep track of.
You want to watch your Vantagescore for short term changes to your credit score and watch your FICO score for longer time frames.
Both Vantage and FICO use the same 5 metrics I talked about earlier to decide your score, but there are some important differences.
First, there is a difference between what FICO and what Vantage considers ‘good’, ‘bad’, and ‘excellent’ scores, as seen in the chart here.
FICO requires at least six months of credit history to calculate your score, while VantageScore only requires one month of history and one account reported within the past two years.
That means if you want to see what your short term credit looks like, Vantage is what you want to check out.
Vantage penalizes late mortgage payments more harshly than other types of credit, while FICO treats all late payments the same. That means you will take a bigger hit to your Vantage score than your FICO score for late mortgage payments. Late credit card payments have the same impact on both scores.
Another difference is Vantage scores are updated more frequently than FICO scores. Vantage scores are updated every 14 days compared to just once per month for FICO scores.
Its a simple as this: you follow the formula and you get results. And we cant get right as a people until you get right as a person. Take action.