How to establish credit in the Hispanic and Latino community

Hispanic and Latino families in the U.S. continue to face a variety of challenges when it comes to establishing financial well-being. There are continued, systemic barriers to wealth building, such as labor market discrimination, which result in Hispanic and Latino families being less likely than white families to own assets such as homes, businesses and retirement accounts. This asset poverty contributes to a significant wealth gap, with Hispanic family wealth amounting to just 21 cents for every $1 of white family wealth.

Navigating the financial system in order to establish and maintain credit can also be a major challenge — one that has significant ramifications.

“In many cases, especially among first and second generation Latinos and Latinas, they have limited knowledge of the U.S. financial system as a whole,” says Emanuel Rivero, senior director of the Hispanic Centers for Financial Excellence. “Managing a banking relationship, establishing emergency savings, building good credit and other basic functions worked differently in their country of origin, and they sometimes don’t know what questions to ask in order to get ahead.”

Financial challenges

Some of the financial challenges faced by the Hispanic and Latino communities include asset poverty, a continued gap in financial literacy and limited understanding of how to build and maintain credit.

Owning fewer financial assets

There continues to be significant wealth gaps in this country among white families and Hispanic and Latino families. This is especially apparent when looking at the accumulation of significant financial assets.

A study of the wealth gaps between white, black and Hispanic families published by the Federal Reserve Bank of St. Louis found that Hispanic families are less likely than their white counterparts to own homes, businesses and retirement funds. And when they do, these assets have a lower value.

The same report points out that white families are both more likely to own various asset types and those assets are likely to be of higher value. More than 70 percent of white families own homes for instance, compared to less than 50 percent of Hispanic families. About 15 percent of white families own a business, compared to less than 10 percent among Hispanic families. The median value of stocks, bonds and mutual funds held by white individuals is about $50,000, while for Hispanic individuals it is well under $20,000.

Lack of financial literacy

Limited knowledge of the financial system in this country and a lack of general financial literacy also continues to be an obstacle for Hispanic and Latino communities.

“There is a lack of financial literacy because most Latino and Hispanic [families] focus on passing on values more than anything else,” says Ana Zamora, a Spanish-speaking financial advisor who grew up in Columbia and moved to the United States at age 21. “Your parents don’t show you how to save money or what kind of assets you can get access to or how to invest money. Nobody has that conversation with you.”

The 2021 TIAA Institute-GFLEC Personal Finance Index confirms what Zamora is saying, revealing that Hispanics continue to have lower levels of financial literacy. The index found that Hispanics answered just 41 percent of the personal finance index questions correctly, compared to 55 percent of whites.

Limited credit history

A good credit score is a necessary prerequisite to open many doors to wealth building. Unfortunately, there is a persistent knowledge gap among Hispanic and Latino communities when it comes to accomplishing this step.

“How to establish and maintain a good credit rating can sometimes be a new concept to learn in the United States, and in many instances the [Hispanic and Latino] population tends to avoid the issue altogether,” says Rivero, who specializes in the Latino financial experience in the U.S. “That can result in them being unbanked and ‘credit invisible,’ meaning they have no credit history or very limited, and normally negative, credit histories.”

Why is credit so important?

There are many reasons why having a credit profile is beneficial to overall financial well being. Today’s economy runs on credit, and having a credit score is a prerequisite for everything from obtaining a mortgage to applying for an auto loan.

“Without credit, many of our necessities would be unattainable,” says James Lambridis, CEO of Debt MD. “In addition, credit and borrowing are the underlying principles that drive financial markets. This has always been and always will be the backbone of every financial institution.”

Establishing credit is not only important for borrowing money. Landlords, insurers and employers may also look at an individual’s credit information to determine whether they’re dealing with someone who will be reliable.

Lower interest rates

Understanding how to establish and maintain a good credit score also makes borrowing far less costly, allowing applicants to obtain more competitive interest rates. Paying less interest on debt can save you a significant amount of money over time.

“With bad credit, necessities such as a home, car and insurance become much more expensive,” said Lambridis. “Not only will your interest rate be higher when applying for any type of loan, but your insurance rates will also be pricier. Bad credit will cost you thousands of dollars in the long run, so it is very important to establish and build credit.”

Easier credit approval

Establishing a history of borrowing — and responsibly repaying — debt not only increases your credit score, but also allows lenders to more easily assess your creditworthiness and approve future credit or borrowing requests. When you have a solid credit history, banks and lenders are more likely to approve such credit applications

“With higher credit scores come increased approval odds for obtaining new credit,” says Rivero.

Better loan terms

Yet another important benefit associated with establishing credit is the ability to access more favorable loan terms than those who have poor credit. This might include receiving a higher credit limit on a credit card or being able to access a fixed-rate mortgage.

“Credit is very important to make your life easier and to be able to have debt working for you,” says Zamora. “And the only way to have your debt working for you is when you are able to access good terms and better interest rates.”

Higher credit limit

Similar to better loan terms, those who have a well established credit score are typically able to access higher credit limits on credit cards and other types of borrowing.

Finding the right credit card

Opening a starter credit card can be one of the easiest ways to establish credit. Maintaining a credit card account allows for building positive credit habits, like paying your bill on time, and shows lenders you’re able to responsibly manage your money and debt. About 77 percent of Hispanic individuals have a credit card, compared to 88 percent of white consumers, according to a 2021 Federal Reserve Economic Well-Being of U.S. Households report.

Finding the right credit card for your needs and specific stage in life is also an important part of this process. For those who lack any credit history, or who may have a low credit score, opening a secured credit card can be a good first step. Secured credit cards provide users with a limited line of credit in exchange for an affordable, refundable security deposit that acts as your credit limit. Managing your secured line of credit responsibly builds your credit score.

“Getting a secured credit card is the best way for lenders not to take any risks and it’s very affordable for the consumer,” said Zamora.

If you’re a college student, you might consider credit cards aimed at students. There are also credit cards that offer cash back rewards or points for individuals who have a lot of car or fuel expenses.

Once you obtain a credit card, it is important to use it responsibly in order to create a solid credit score. Doing this involves making on-time payments, keeping your credit card balances low and paying off the balance in full.

“A credit card that’s used responsibly can be a great way to build credit,” said Rivero. “If  you open a new credit card account, pay your bill on time, and keep the balance at 10 percent of the credit limit or less, it will go a long way to create a strong credit profile.”

Alternative ways to build credit

There are many other options for building credit beyond opening a credit card. While credit reporting agencies often use credit card purchases and payments to assess your ability to responsibly manage money and repay debt, there are other ways to accomplish this goal.

Credit builder loans

Credit builder loans are a good option if you have a limited credit report and are having a hard time getting approved for other types of loans. When using a credit builder loan, the lender will place the funds into a secure account. As the borrower, you’re not able to access that money right away. You will be required to make payments every month until you’ve paid off the full loan and then the loan proceeds will be made available to you.

Personal and auto loans

Alternatively, if you already have some credit history established, you may be able to take out an auto loan or personal loan. Making these types of loan payments on time and paying the debt back in full as soon as possible improves your credit score.

Paying monthly bills

One of the simplest ways to improve your credit profile is to diligently pay all of your monthly bills on time. Rent payments are one of the most common recurring payments that many consumers make each month. Your credit score could increase if you consistently pay your rent or other utility bills on time. Paying other bills on time as well, such as your utility or cable bills, can also help notch up your credit score.

Authorized user on another credit card

If you’re still searching for avenues to help increase your credit score, consider becoming an authorized user on someone else’s credit card. In this situation, you gain access to the primary credit holder’s credit line as an authorized user and receive a card in your name. The overall credit card activity on the account, including consistent on-time payments, will be reported to credit bureaus. This setup also means it’s important to find someone who has proven to be a responsible card holder and makes their payments on time, so that your credit is positively, and not negatively, impacted.

Utilizing Hispanic credit unions

Hispanic credit unions and banks are financial institutions that offer services tailored or designed for the needs of the Hispanic and Latino community in the U.S. These financial institutions typically provide essential banking services to help people of this demographic open bank accounts, access loans and even invest for retirement.

“Hispanic credit unions are financial entities that were created to support minorities and offer a sense of belonging and to bridge the language barrier that often exists,” says Zamora. “These entities were created to give minorities access to the financial system in an easier way, so they can get access to a bank account.”

As of March 2022, there were 196 credit unions across the United States that qualified as Hispanic-owned, according to the National Credit Union Administration (NCUA). These types of offerings are important because nearly one-third of Hispanic adults in the U.S. did not have a bank account of any kind as of 2019 and relied on alternative financial tools, such as high-interest payday loans.

Financial resources for Hispanics and Latinos

There’s a variety of consumer resources to be aware of if you’re hoping to learn more about personal finance or get started on building credit.

Consumer Financial Protection Bureau

The Consumer Financial Protection Bureau is a U.S. government agency that was created to ensure that individuals are treated fairly by banks, lenders and other financial entities. The CFPB website provides education on everything from auto loans and credit cards to debt collection. You can also connect with housing counselors through the website and get assistance planning for future financial goals.

The Hispanic Center for Financial Excellence

The Hispanic Center for Financial Excellence (HCFE), offers financial advice to low- and moderate- income individuals and families. The non-profit seeks to offer a holistic approach to education and financial advice that was created by Hispanic individuals for Hispanic individuals.

The HCFE seeks to help Hispanic families reach short and long-term financial goals and establish economic security. This effort includes teaching clients how to understand and navigate the U.S. financial system.

Juntos Avanzamos

Juntos Avanzamos is a network of credit unions focused on serving and empowering Hispanic individuals and communities. There are 128 Juntos Avanzamos credit unions in the U.S., located in 28 states throughout the country.

Managing and avoiding debt

Avoiding debt whenever possible is important to financial success. Accumulating more debt than you can afford to pay and failing to pay debts in full impacts your ability to borrow money again in the future. Worse still, you may find yourself in legal trouble — being sued by lenders seeking to collect the money you owe.

There are many ways to help yourself avoid getting into debt or allowing debt to grow out of control, including the following:

• Automate payments. Automating your payments can ensure you never fall behind or miss a monthly payment. Taking this step allows you to stay on top of debt more easily.
• Keep your credit utilization low. Your credit utilization is one of the most important factors when it comes to your overall credit score. Credit utilization is how much debt you owe across all of your open lines of credit, compared to your total available credit limit. It’s best to keep your credit utilization below 30 percent of your available credit. Maintaining a low credit utilization can help prevent you from getting in over your head with debt.
• Pay off high-interest debts first. Paying off debts or credit cards with the highest interest rates first allows you to minimize the overall amount of interest you’ll pay. In addition, when you save money by paying less interest you can redirect those funds toward other financial goals.

FAQs

• • How can I build credit fast?

    Some of the best ways to build your credit quickly include paying off any debts that you can, reporting your rent and utility payments to credit bureaus using tools such as Experian Boost, and opening a secured credit card.
    

  • What credit score do you start with?

    There’s no such thing as a “starting credit score.” The credit score you start with generally depends on how you begin building credit. Individuals who have not even started using credit yet will likely not have a credit score. Your credit score begins to take shape after you open your first line of credit, whether that’s a secured credit card or a loan of some form.
    

  • What is a good credit score?

    In general, a good credit score is one that falls somewhere between 670 and 739, according to FICO, while a score above 800 is considered exceptional. A score ranging from 580 to 669 is considered fair.
    

  • What can build my credit score?

    There are a number of ways to build your credit score. Depending on your financial picture, you might choose to start by opening a secured credit card or you could open a traditional credit card or personal loan. No matter which option you choose, the key is to pay your monthly bills consistently and pay the debt back in full as soon as possible.