With the right moves, you can build credit, address existing credit issues head-on, and establish financial stability as a cannabis professional.
By Natalie VanderVegt, Member Outreach and Engagement Manager
Credit can be a scary topic, especially if you’re just beginning your financial journey in the cannabis sector. It doesn’t help that there are so many myths and misconceptions about how credit scores are calculated. But in truth, the algorithm that determines your credit score is no mystery or secret.
Here’s the breakdown of how credit scores are calculated:
- 35% is payment history.
- Have you paid past credit accounts on time? Etc.
- 30% is the amount owed.
- Owing money on your credit accounts does not necessarily mean you’re a high-risk borrower or that your credit score will suffer. But if you’re using a lot of your available credit, this may indicate that you’re overextended, which can lower your score.
- 15% is length of credit history.
- A longer credit history is generally positive for credit scores, but is not required for a score.
- 10% is credit variety.
- This includes your mix of things like credit cards, retail accounts, installment loans, finance company accounts, and mortgage loans.
- 10% is new credit.
- Opening several credit accounts in a short amount of time indicates a greater risk for lenders, especially when the person opening those accounts doesn’t have a long credit history.
Know What You Have
The first step to building or repairing your credit is to know where you stand. Head to AnnualCreditReport.com and get a free copy of your credit report. While the report won’t provide your credit score, it will give you a detailed overview of your credit history and help you identify areas that need improvement. Those key credit elements—payment history, amount of debt, length of credit history, new credit items, and mix of credit—will be clearly documented. If you have negative items on your credit report, it’s essential to know about them so you can address them head-on.
Repair Your Credit
The Consumer Financial Protection Bureau (CFPB) has worked with FICO (the operator of credit scoring models that many lenders use) over the last few years to make credit reporting more equitable. The result is new scoring models that can now quickly improve your credit, instead of the seven years it used to take for some negative items to be removed from your history. Debt can grow substantially when late payment fees accumulate, but it’s often possible to lower these fees through negotiation. This is particularly relevant for individuals dealing with fees from medical debt, which is the leading cause of bankruptcy in the country.
At Salal, we work with your creditors to identify the most favorable options for resolving your situation. This can include negotiating lower payments, setting up payment plans where you can pay in smaller installments more frequently, or consolidating your debt. By addressing these issues with creditors, we can rapidly improve your credit scenario.
Build Your Credit
Building credit is like planting a seed; it takes time to grow. The sooner you start, the better. If you have a clean slate with no negative marks on your credit report, consider applying for a credit card with a low limit (around a $500 to $1,000 line of credit). If you’re trying to overcome past credit problems, you might need to begin with a secured credit card.
Secured credit cards are backed by a savings account, making them accessible even if you’re not yet ready to address collections or other negative items on your credit report. As you use the card responsibly, your credit history will start to improve.
You can also use standard credit cards strategically to build credit. Consider obtaining a credit card from a not-for-profit institution like a credit union. Even if you don’t plan to use it, make sure to simply keep the card open. Believe it or not, an open credit card account, even when not used at all, can help improve your credit score. While a major bank will close the account linked to an unused credit card, a credit union like Salal will not.
Maintain Your Credit
Since your payment history accounts for 35% of your credit score, it’s important to consistently pay your bills on time. At Salal, you can partner online or in person with our credit counselors and budget specialists, who will provide valuable advice on maintaining and improving your credit score while managing your finances effectively.
Our experts can help you develop a personalized plan tailored to your specific financial situation. They can also help you regularly review your credit report, shop for better rates, and consider refinancing options to reduce any interest costs. With non-profit institutions like Salal, you can often secure lower interest rates as your credit improves.
Explore Additional Credit Options
You can further strengthen your credit profile by combining a personal or a home equity line of credit with your credit card. These lines of credit offer cash access, allowing fee-free transfers into your credit account in an emergency. This approach can safeguard against financial setbacks while bolstering your overall financial well-being.
Once your credit improves and reaches a certain level, you can make additional tweaks that can raise your score even higher. The CFPB now allows you to submit utility bills and rent receipts that prove you have paid on time. Even a letter from your landlord stating that you regularly pay your rent on time can improve your credit score.
Work on Your Credit Score Now
Building credit from scratch as a cannabis professional can seem daunting, but with patience, responsible financial practices, and the right guidance, you can absolutely establish a solid credit history and raise your credit score. Remember that credit is a valuable tool that can open doors to financial opportunities and enhanced security.
Reach out today to chart a course to analyze, repair, and/or improve your credit. Our financial experts know how the cannabis industry operates, and can empower you to maximize your financial resources and establish a secure financial future.