Amid rising inflation and high interest rates, credit card usage soared between April and June, leaving credit users wondering what they can do to improve their credit scores. With the threat of a recession in the near future prompting people to put aside money and prepare for a rough economic period, those who are still recovering from the pandemic and reliant on credit are particularly vulnerable.
“It’s been a huge problem since COVID started, with people getting in over their head to the point where they can’t pay bills,” Jason Kaplan, president of The Credit Pros, a credit repair company, tells TIME.
The Consumer Price Index, a measure of how expensive goods and services are, had its largest increase this year since 1981, the U.S. Department of Labor reports. Since the pandemic began, luxury purchases have decreased nationally. As recently as last month, Best Buy CEO Corrie Barry made a statement about a decline in electronics sales. A growing number of credit users are using credit to pay for household goods and essentials, as opposed to nonessentials or luxury items.
“In an environment where there’s a need for money and resources as well as a lack of education as to what the long-term effects (of low credit scores) are, or even the short-term effects, being financially responsible and budget-oriented (is difficult). These are all problems we have in this country and it’s compounding,” Kaplan says. “It’s been exacerbated by COVID, by inflation, but it’s a cycle that happens in this country every 15-20 years.”
Why Your Credit Score Is Important
Credit scoring is a numerical system that only predicts how likely a person is to pay their bills on time in the next two years, yet it affects numerous aspects of life, according to Kaplan. A low credit score can restrict a person’s ability to rent housing, apply for a mortgage, buy a car, have insurance and even get a job.
“Your credit score is a completely mechanical process. There’s a formula, there are a finite number of factors that go into your score. In the big picture, good credit today is more important than it has been in the last 10 years,” Jim Kemish, president of Sky Blue Credit, a credit repair company, tells TIME. “It’s because with interest rates going up, the penalty that you will pay for poor credit is higher than it was.”
Kemish said that employers in some fields are now looking at credit scores for job pre-screening and if employers don’t like what they see—i.e. an applicant has a low score or a late payment on their credit report—it can affect a person’s ability to gain employment.
Credit usage is distinctly part of American culture and it’s embedded in most aspects of society. Intertwined with that, however, is a lack of financial literacy that affects economically vulnerable individuals the most, Kaplan explained. He added that legislation like the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009, which reduced predatory lending through regulating fees, enhancing consumer disclosures and protecting young consumers, still has many holes and that people need to be careful.
“We’re in an economic environment here in the United States where people usually get things in advance of being able to pay for them. It’s buy now, pay later. In a good way, it’s a way that America is one of the leading economic countries in the world where everyone seems to have opportunities to borrow and to invest and grow,” Kaplan says. “There are positives and there are negatives to it.”
How to Improve Your Credit Score
Both experts recommend techniques people can use to improve and maintain a high credit score, including paying bills on time—especially if one goes to collections—, aiming to use only 20-30% of their credit limit, and checking their credit report regularly.
“The biggest part of your credit score, which is about 35%, is your payment history. My advice first and foremost is to always pay your bills on time,” Kaplan says. “That doesn’t mean to pay off an entire bill. There are minimum payments you can make with credit cards or sometimes even services.”
Kaplan said also it’s essential to have a well-rounded mix of credit for different purposes.
“The idea is if you have a proper mix of credit, a credit card, mortgage, car payments, a loan from a bank, having all of them (implies) that you are a well-refined, successful adult living the right life, as far as the credit score is concerned. You’re less of a risk because you’ve taken part in all of these institutions,” Kaplan says.
Some consumers worry that checking your credit score can have a negative impact, but Kaplan explained that consumers are allowed to pull their scores as much as they want, also known as a soft inquiry. However, when third-party companies pull a consumer’s score, it’s a hard inquiry and a large number of hard inquiries over a limited period can lower your score, so it’s important not to shop around for loans or new lines of credit too often.
It’s also important to check your credit report often to ensure that there aren’t any errors, as they are a lot more common than people think.
“Get all three credit reports. Proofread them carefully. If you’re confused, hire a credit repair company to help you understand what you’re looking at,” Kemish says. “Look for errors. Errors can be very costly to your score. If you find something that’s not yours, if you find an old paid account that’s still reporting a balance, you’ve got to dispute it. If you ever had a collection which you paid, don’t trust the collector to report it as paid. You have to keep an eye on your own credit report.”
If you ever have a bill go to collection, it’s vital to pay it, but that you can try to negotiate the bill to a lower price, especially if it’s an old bill going back a few years, Kemish said. Both experts emphasized the importance of having an emergency fund for rainy days and trying to save a little bit of money every month, but acknowledge that this isn’t attainable for everyone and is far more difficult for those living paycheck to paycheck or deep in debt.
“Money in the bank is power. Power to pay your bills on time, Power to cover emergencies that come up, power to know that you can take a vacation if you want without running up your credit balances,” Kemish says.
Everybody’s financial situation is different and what matters most is being mindful of how you use credit.
“It’s important for everybody to have compassion for their own situation. No one should feel guilty about falling behind,” Kemish says. “Just try to make smart decisions and when it comes to your credit, the most important thing is to be conscious of the connection between your credit score and your life. It’s easy to make the decision to get that piece of plastic out and buy anything you want and to suddenly disconnect that from your ability to get a job and to get ahead.”
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