(Michigan Chronicle)—Credit is a main component in purchasing power. Whether it is for a home or car, credit scores can impact approval. However, many are not aware of their credit scores and often commit credit faux pas effectively lowering their score. A difficult task to raise, it is crucial for consumers to keep their credit limit high to increase purchasing power. However, it is not the only number to be aware of when shopping around for the perfect home.
Though credit is a contributor in making large purchases, such as a home, it is not the determinant. Credit scores help creditors get a snapshot of how debts have been handled by consumers in the past, but it does not provide the full picture. Debt-to-income ratios are taken into account when determining a person’s purchase power and are ultimately the key to unlocking your home.
The credit score is used to determine a client’s rate and the costs associated with it. The score is not used to determine buying power, one’s Debt to Income Ratio, DTI, is. We determine how much buying power a client has by taking all of the debts on their credit report, as well as any other financial obligations such as alimony and child support and dividing the required monthly payments by their gross monthly income to determine the client’s DTI.” Says Brian Cook, a Triple Crown Mortgage Banker. “Most of the time, people with better credit will have lower rates on their debts, meaning their monthly payments are lower. This in turn gives people more buying power because their money can go towards their purchase rather than interest to the creditors.”
Statistically, African American communities typically have lower credit scores and higher rates of DTI. Enlarging the wealth gap, credit and DTI can make it harder for Black and brown communities to obtain the American dream of homeownership, which has been shown to have a direct correlation to wealth. To curve this, consumers must take charge of their credit and lower the amount of debt coming out of their pockets.
“One can improve their credit rating by having older accounts that are in good standing, keeping utilization under 30 percent of the credit limit and consistently making on-time payments. Collections can be negotiated once sold to debt collection agencies and there are credit specialist who are experts in this field to assist with those,” says Cook.
Though financial sustainability is not often taught in Black communities, economic education can help curve common mistakes made on credit add the accumulation of debt. Mistakes early in credit establishment, which consumers can obtain as early as 18-years-old, can lead to a lifetime of playing catch up.
“The biggest mistakes I have seen are co-signing for debt, having high utilization meaning they are at or close to their max available credit limit and people believing they don’t need credit,” says Cook. “I sometimes get clients that think because they pay cash for everything that means they are in a good spot. In terms of credit, especially when qualifying for a mortgage, we need to see a history of credit.”
Those liking to branch out and start their own business will not have to contend with their personal credit to get their business up and going. While personal credit is associated with the consumer’s Social Security number, business credit is linked to a company’s Employer Identification Number, or EIN. A Tax ID Number may also be used to establish credit for a business.
“Credit does impact this but personal credit and business credit are two different things. You typically need to establish business credit versus personal credit when using it for business purposes,” says Cook.
For those looking to get a handle on their personal finances, services are available that will help to build credit, decrease DTI and pity consumers in the perfect position for purchasing. Remembering to pay balances off on time and limit the amount of debts can make the difference between rental and ownership.
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