Inflation increases credit card usage, stress among Americans: Survey

Credit, by one broad definition, is your ability to borrow money or secure goods or services while agreeing to pay later. The amount and type of credit available to you is determined by your three-digit credit score. FICO scores are the most common credit scoring system used by more than 90% of financial institutions. FICO scores range from 300 to 850. Scores below 580 are considered poor. Anything above 740 would put you into the range of very good to exceptional credit. Customers with scores in this range qualify for the best interest rates and offers.

It’s important to maintain a high credit score, or work to improve a lower score, because the score dictates what interest rate — the amount you’re charged by a lender to borrow its assets — you’ll receive when taking out loans or applying for credit cards. The type of deals offered for cell phone plans, insurance products, or deposits required for utilities, for example, also can be affected by your credit score. The lower your score, the more you will pay, as creditors deem you as a high financial risk.

Let say, for example, that you finance a $10,000 used car over 48 months. Customers with excellent credit scores (typically 750 or more) would qualify for an average rate of 8.18%. You will pay $245 a month and $1,759 in interest over the life of the loan. Car buyers with fair credit scores (600-699) are looking at average interest rates of 14.89%. A seven point interest rate jump will increase your monthly payments to $278 per month for a total of $3,332 in interest over the life of the loan. A 51-point drop from 750 in your credit score could cost a buyer an additional $1,573 in interest for the exact same vehicle. Maintaining the highest possible credit score allows you to access credit at the lowest rate. Healthy credit affects your bottom line directly.

Credit Sesame’s Personal Finance and Credit survey also pointed out that many Americans are misinformed when it comes to basic financial literacy. The results show that nearly one in six don’t know their credit score. What’s more, 40% were unaware that lenders use a credit score to determine their ability to repay loans.

FICO, the organization responsible for developing the FICO credit score, suggests three main tips that anyone can follow to improve their credit score:

1. Fix any errors on your credit report. Retrieve a free copy of your credit report from the three credit reporting agencies — Equifax, Experian, and Trans Union — once a year. A study by the Federal Trade Commission showed one in four people found an error on their credit report that could impact their credit score.
2. Pay your bills on time. Payment history is the largest factor used to determine your credit score. Even one 30-day late payment can have a significant impact on your score. Adding paying reminders or setting up auto-pay services are great ways to ensure that your bills are paid on time. Improving your score will take time, but with consistency and an on-time payment history, your credit score will improve.
3. Reduce the overall amount of debt. Keeping your debt utilization rate below 30% is another key factor that can improve your credit score. Maintaining an outstanding debt balance that is no more than 30% of the available credit should be your goal. Therefore, creating a plan to reduce the amount of outstanding debt will save you money each month. The amount of interest you’ll pay each month is calculated based on the outstanding balances owed on loans or credit cards.

Lowering your expenses by qualifying for the best interest rates and paying less interest overall is one tool consumers have to reduce the impact of rising inflation. The National Foundation of Credit Counselors can assist with locating nonprofit credit counselors for those who need additional support getting problems with debt and credit card abuse under control. 

ZDNet has profiled several categories of credit cards for those who need to establish or rehabilitate bad credit. From secured cards to cards with no fees and great rewards, with the right tools and a little hard work rebuilding credit is possible.