How Credit Can Become a Tool for Building Real Wealth

Credit is a powerful tool that you can leverage to build wealth. Having credit scores explained and understanding the information in a credit report are good ways to understand lending criteria and the factors that impact your borrowing ability.

For example, buying a home or investing in a business are two assets where you can use credit to acquire and grow your wealth.

Members of the Black community have historically faced systemic issues in lending practices. So, it’s also essential to understand your rights in obtaining credit to recognize and avoid this kind of experience.

This guide explains everything you need to know about credit, including how to understand credit scores and leverage credit for growth.

Credit Scores Explained – What They Are and Factors That Impact Them

A credit score is a three-digit number assigned by each of the three major credit bureaus: Equifax, Experian, and Transunion, that is calculated via scoring models like FICO 8 and VantageScore 3.0. Lenders use your credit score to predict how you may repay a loan.

A credit score typically ranges from 300 to 850. Experian rates good credit from 670-739, very good credit from 740-799, and exceptional credit from 800-850.

Multiple factors impact your credit score:

• Payment history
• Current amount of unpaid debt
• Number and type of loan accounts
• How long your loan accounts have been open
• How much available credit you are using
• Number of new credit applications
• Whether you’ve had collections or filed for bankruptcy

For optimal credit, you should use less than 30% of your available credit on your credit cards. And spread out your credit applications — don’t apply for a bunch of new credit cards all at once. Making timely payments is one of the heaviest-weighted factors in your credit score. Always make your payments on time and never let an account become 30 days late or longer.

What Information Is in a Credit Report?

When you apply for many types of credit, the lender will do a hard pull of your credit report. A hard pull typically reduces your credit score a few points, regardless of whether the lender approves or denies your application.

Your credit report contains information about your credit activity that your creditors report to the credit bureaus each month.

It contains your personal information, such as your name and any former names you’ve used, current and previous addresses, your birthdate, social security number, and current and former employers.                      

Your credit accounts, including:

• A list of current open credit accounts
• Former closed credit accounts
• The type of each account (revolving, installment, mortgage, student loan)
• Credit limit for each revolving account
• Account balance
• Payment history and status
• Date account opened and/or closed
• Creditor’s name

The report also lists missed payments, loans, or debts sent to collections, as well as information from a state or local child support agency about outstanding overdue child support.

Public records also appear on your credit report and include:

• Liens and foreclosures
• Bankruptcies
• Civil suits and judgments

Public records and missed payments have a negative impact on your credit score.

Your report also lists credit inquiries (companies that have accessed your credit report when you apply for credit or that pre-qualify you for credit).

Maintaining a Good Credit Score

If you want to leverage credit to build wealth, maintaining a good credit score is essential to getting approved for a credit card, mortgage, home equity loan, home equity line of credit, or personal loan.

To maintain, build, or improve your credit score, you must:

• Make timely payments.
• Use less than 30% of revolving credit lines.
• Avoid collections and public records.
• Establish a long credit history with individual creditors.
• Avoid applying for multiple credit accounts too close together.
• Review your credit report periodically to ensure it doesn’t contain errors.

Understanding Your Credit Rights

The Federal Trade Commission (FTC) “enforces credit laws that protect consumers’ rights to get, use, and maintain credit.”

The laws don’t guarantee individuals will get approved for credit. However, they protect a person’s rights by “requiring businesses to give all consumers a fair and equal opportunity to get credit and to resolve disputes over credit errors.”

For example, the Fair Credit Reporting Act (FCRA) ensures the accuracy and privacy of files maintained by national credit bureaus and entitles each person to receive a free copy of their credit report once every 12 months at consumer.ftc.gov.

The Equal Credit Opportunity Act (ECOA) “prohibits credit discrimination on the basis of sex, race, marital status, religion, national origin, age, or receipt of public assistance.”

Every business or institution, like banks, credit unions, loan companies, and real estate companies, must follow this law. This means:

• You can’t be denied credit due to your race, sex, marital status, religion, age, national origin, or receipt of public assistance.
• You have the right to have reliable public assistance considered in the same manner as other income.
• If you are denied credit, you have the right to know why.

Leveraging Credit for Growth

Strategically using credit to increase assets can help you build wealth. Examples include:

• Obtaining a mortgage to buy a house and build equity that increases the value of your assets over time
• Taking out a home equity loan or line of credit to upgrade your home or buy more real estate, such as rental properties, to increase your income
• Opening a 0% credit card (which charges no interest for a set promotional period) and using it to increase your wealth with real estate or business investment opportunities, then repaying the debt during the promotional period to avoid paying interest
• Using credit cards or credit lines to buy and resell items for a profit (some people call this “flipping” or “retail arbitrage.”
• Opening and repaying a credit card to boost your credit score, increase your cash flow, and buying power
• Using credit to pay for college or trade school to advance your skills and future career and income opportunities
• Leveraging welcome bonuses, cash reward programs, and credit discounts to save money and channel it toward business opportunities
• Taking out a small business loan to start and grow a small business

Overall, understanding credit and wealth-building can help you use credit wisely to invest in real estate and business opportunities, improve your credit score and profile, and build wealth for yourself and future generations.

Sponsored by JPMorganChase

MSR + JPMorgan Chase have partnered to bring you the Finances FYI series. JPMorganChase is committed to helping close the racial wealth gap and driving economic inclusion for Black, Hispanic and Latino communities. Join us every Monday for tips, advice, and vital information to improve your financial literacy.