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Perhaps you’ve learned that holding debt is wrong. That’s not quite true. Being buried or in bondage to debt is what’s unhealthy. Debt or “other people’s money” used correctly is beneficial. It’s why the wealthy always have properly leveraged debt to grow wealth. So it’s a skill and strategy for wealth development you must learn, too.
That’s why even for basic activities, today, you need good credit for every move you make that involves finances. From getting a job to renting a place to live, even the youngest adults must start their lives out with good credit. Funding graduate education, buying homes or starting businesses later become impossible without good credit.
That means establishing good credit with the right strategies and understanding how credit scoring works to keep yours high is an early adulthood imperative.
Correctly used and managed, credit can be a foundation for wealth, the measure of an individual or family’s net worth. Determine your net worth by subtracting your liabilities from your assets or the the total amount you owe from the value of all you own. Having a high enough net worth makes economic, social and even physical mobility, not only possible but easier.
But, for some groups, it’s more imperative to have strong credit just to catch up to generations of Americans before them. They’re still challenged to meet that requirement because the country’s banking system still puts up roadblocks for them.
America’s Wealth Gap
Studies prove that all people of color in this country have substantially less wealth than white people and white women have less wealth than white men. This wealth gap is a function of America’s history of systemic racial and gender inequality. That’s not a slam on any group; it’s the country’s reality and it’s one many white men want to see fixed as people of color.
African Americans, Latinx, Natives and Asian Americans all have significantly less wealth than whites. From one generation to the next, no matter how hard they work, they find wealth harder to obtain and harder to keep.
But, in many cases, the glaring wealth inequality easily gets tied to lack of access to credit. In other words, the relationship between credit inequality and wealth inequality is undeniable. That’s most evident in shows in mortgage lending.
Home Ownership Still Key to Wealth Building
Real estate ownership is one of the six pillars of wealth building. One self-made millionaire describes it as “the escalator to wealth.” Even for many average Americans, real estate funds life activities from children’s education to retirement.
Homeowners use their home equity—the difference between a home’s value and the remaining mortgage on the house—to pull cash from their homes for those and other purposes, like investing. But, that’s still mostly true for white families, even middle class ones whose wealth is in their homes.
They were the first and only group to benefit from mortgage lending when it got extended in 1934 beyond wealthy whites. That has given middle-class whites a decades-long head start in building their wealth.
African Americans in particular but all American people of color generally got legal access to mortgages over 50 years ago. But, they’re still blocked from getting home loans. Today, white home ownership is 30% higher than black home ownership. The average homeowner is 38 times wealthier than renters. That’s why whites have nearly ten times the wealth of blacks.
One reason people of color (and young people) find buying homes so daunting in the US is no or low credit score. That’s partly because, though they regularly pay bills on time, they lack the credit types current credit scoring models consider important for score creation. Those include credit cards and installment loans, like mortgages.
U.S Senator Tim Scott is determined to end that with his bill, the Credit Score Competition Act. Lenders could use the alternative credit scoring model created under the legislation to allow reporting of rent, utility and cell phone payments paid consistently to determine creditworthiness.
More Americans now considered “credit invisible” could get access to mortgages when their credit applications get evaluated against this new credit scoring method.
Take the Reigns of Your Credit
Whether you’re new to credit or trying to restore your current credit, it’s unnecessary to wait for a bill to pass. For one thing, the major credit reporting agencies implemented alternative scoring methods at least a decade ago. For another, unless you’ve got severe credit blemishes, you might be able to build traditional credit within months.
But, you’ll need to look past or blast through the obstacles and build the credit you’ll need to improve your current life chances and build wealth. After all, many have before you and not only celebrities.
(c) 2018. Dahna M. Chandler for Get Money Moxie, Inc. All rights reserved.
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