Written by Alex Vazquez, Credit Analyst & Financial Coach at ASSETS
For many of us, our credit score doesn’t begin to cross our minds until we become adults. Then, we become fixated on getting our credit score as high as possible. But, is your credit score really that important? Well, this is a relative question and the answer to this question is: it depends.
To keep things simple, your credit score only comes into play when it’s time to borrow money. For example, your credit score is evaluated when you apply for a credit card, auto loan, mortgage, etc. If you plan to never borrow money for the rest of your life and pay cash for everything, then no, your credit score doesn’t matter.
If only life were that simple.
Because paying cash for everything for an entire lifetime is not a reality most of us will experience, we have to face the facts. Your credit score can impact opportunities such as employment or apartment rentals. If you’re a small business owner, your credit score can impact contracts or vendors you do business with. To further complicate the issue surrounding credit scores, historically, people of color face barriers to good credit due to existing racial inequities in our credit system and economy and oftentimes a lack of generational wealth as well.
So, how do we combat barriers to credit? Well, it’s important to strive for overall financial health. When it comes to borrowing money, your credit score is only one piece of the puzzle that can determine whether you will get approved for a loan. Here are some other determining factors when being considered for credit.
1) Net Worth
Net worth is the value of all assets, minus the total of all liabilities. Your net worth is factored into the decision when creditors are considering extending you credit. If you have a positive or strong net worth, creditors weigh you as less of a risk than a person with a negative net worth.
2) Down Payment
Putting some skin in the game tells a lot about a potential borrower and in some cases can affect the interest rate you receive on the loan. In general, the higher your down payment is, the lower interest rate you can receive.
As a business owner, your character can make a big difference when being approved for credit. But, what do we mean by character? Well, your “character” as a business owner is measured a few different ways. How long have you been in business? How much experience do you have in the field that you’re in? Does your business have a good reputation?
4) Existing Debt
It is important to manage your existing debt by dividing it into payments you can afford. The way you do this is by measuring your debt-to-income ratio. Your debt-to-income ratio takes into consideration all of your monthly debt payments and divides them by your gross monthly income (before taxes). You should strive not to exceed 43% DTI (debt-to-income). If you really want to strive for financial health, you should evaluate your DTI based on your monthly net income (after taxes have been taken out). After all, this is the real money that you see.
These four factors also come with their own set of challenges for some people. At ASSETS, we know that the traditional means of extending credit (A.K.A. getting a loan from a bank) does not work for everyone. That is why we have a Community Lending Department that focuses on breaking down barriers to traditional lending in order to build a more prosperous and equitable economy that works for everyone. We do this by strategically creating healthy financial foundations with our clients while also partnering with them to address their specific barriers. The goal is to help them eventually bank with traditional institutions.
We work directly with our clients by offering financial counseling to every borrower who receives a microloan through us. Once a month we offer Community Lending workshops that touch on an array of topics to help our clients break down these barriers. We also are fortunate to have partners like Santander Bank and Community First Fund that volunteer their time to help teach our workshops in order to aid our entrepreneurs in breaking down these barriers as well. In addition, we have classes lead by our Entrepreneur Training Department that teach the basics of starting a business. With mentors and resources readily available to our clients, we help ensure inclusive entrepreneurship in our community.
ASSETS’ generous donors also play a big role in helping our community strive for inclusive entrepreneurship and ethical business. If you would like to get involved by helping local entrepreneurs start, grow, and improve their businesses, consider becoming a monthly donor!