Credit can be an incredible tool for achieving life goals. Whether it’s renting in a neighbourhood you love, buying a new home, or starting a business, credit can play an important role in fulfilling some of these goals. As is the case with any tool, however, you must use it wisely to safely reap the maximum benefits.
While managing credit may be easy for people already equipped with money management and finance skills, for some others, budgeting and building credit can be daunting.
We have some “Healthy Credit Do’s and Don’ts” below. But there are two really important concepts to cover first: Financial literacy and financial inclusion.
What Is Financial Literacy and Financial Inclusion?
Financial literacy is having the knowledge, understanding, and skills to confidently make financial decisions, such as budgeting or saving. Financial inclusion, however, takes it a step further.
Financial inclusion helps everyone get on the same track by ensuring equal access to affordable and effective financial products and services for all individuals.
Combining financial literacy with financial inclusion allows individuals to take steps toward meeting their financial obligations while feeling secure about their financial future. This relationship supports financial wellbeing.
Let’s take an example: Imagine you have been offered a credit limit increase of $5,000. Financial literacy is having the ability to determine whether accepting the credit limit increase will ultimately hurt or benefit you in the short- and long run. Financial inclusion, however, can mean having access to the offer to begin with.
When you combine financial literacy with financial inclusion, you are more likely to be in a position to make sound financial decisions to secure your financial future.
Can Financial Inclusion Support Healthy Credit Habits?
In essence, financial inclusion puts everyone on the same track, no matter where they start, and it allows people an equal opportunity to make better credit decisions.
Financial institutions and creditors should share the responsibility of helping individuals build better credit habits by offering them products and services that are in their best interest.
In practice, this can look like:
- Offering customers digital tools that can efficiently and securely provide access to credit options and other products to achieve financial security.
- Providing customers secure ways to support themselves in their financial journey as they build back credit instead of offering temporary solutions (such as payday loans).
- Responsibly offering credit limit increase offers if customers show a pattern of healthy credit use.
Healthy Credit Do's and Don'ts
Healthy credit can make life easier. Whether you are renting a new apartment or buying a new house or a car, a good credit score will allow you to quickly (and more favourably) achieve your personal goals.
Here are some tips to help you stay on track and build a stronger credit score:
- Pay Your Balance on Time and in Full: Missed or late payments harm your credit score, lowering it, and affecting your credit standing and impression on future creditors. If you can pay your balance in full, you can also avoid paying higher interest fees, but paying in full isn’t always feasible for everyone. In that case, pay your minimum monthly payments, or a little extra on top, and ensure the payments are made on time.
- See Credit as a Complement, not a Supplement to Your Income: The minute you start supplementing your income with credit, you increase the risk of not keeping up with payments, lowering your credit score, and paying more in interest fees. Try to see credit as a tool while focusing on paying for what you want with what you have.
- Diversify Your Credit: A credit mix is a variety of credit accounts, including but not limited to mortgages, open accounts, revolving credit, and installment loans. A small yet present consideration in credit score calculation is credit diversification, which is a great way to demonstrate to creditors that you can responsibly manage multiple sources of credit.
Everyone Can Improve their Relationship with Credit
If you’ve struggled with credit in the past, it might feel intimidating but it’s never too late to have a better relationship with credit. One step at a time will help you save money in interest fees, improve your credit terms for future loans, and set you on a financial path for success. There are great resources available to help people along their journey.
Using credit responsibly takes time and practice, and it requires some guidance, but ultimately it benefits the individual, the institutions they trust, and our society.