America's 'unprecedented' crisis: The shocking truth about credit and why it's draining your wallet
Do you run a business? Are you planning to buy a new house or car? What about trying to put away money to invest or save? It’s all tied to your credit, which could be in the midst of an "unprecedented" crisis.
Your credit is the "cornerstone to having any wealth at all," according to Micah Smith, a personal finance influencer and founder of her own credit restoration firm. Today, she’s urging Americans to wake up and realize that they’re likely "vastly overpaying" for things because their credit isn’t where it should be.
"It's not something that is just in your face. It's something that you have to seek out. And I think quite often most people just want to avoid the topic, because if they don't understand how to fix it, it can just become so over the top, overwhelming, that you just kind of avoid it and leave it alone," Smith told Fox News Digital, "not realizing truly how broke it is keeping you."
"The riskier you look on paper, the more expensive everything is going to cost you. So, you want a car, it's going to cost you $200 more a month. If you want a mortgage, it is going to cost you maybe $500 more a month. If you want to have and maintain balances on credit cards, those credit card interest rates, that's what's really keeping us stuck," she explained.
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In the fourth quarter of 2024, consumer household debt in the U.S. hit an all-time high at $18.04 trillion with credit card balances increasing to $1.21 trillion, according to the Federal Reserve Bank of New York.
Additionally, an April 1 survey from Experian found that nearly one in four U.S. adults say they currently have unmanageable unsecured debt.
Smith pointed out that during the coronavirus pandemic, artificial stimulus kept consumers confident and spending.
"What happened in 2020 really caused a major shift. And so we were seeing, right, what was happening is all this money was being pumped into the system," she noted, "and interest rates were lower than they had ever been. And what we saw was the economy was so strong, and it was so hot that, listen, anytime anything runs hot, right, it's eventually going to break."
"What we are seeing is that people are now in more debt than we've ever seen in history… so many people are living paycheck to paycheck, now we're seeing it's just people are having the hardest time getting out from this mound of debt that they're in," she continued.
Smith, dubbed a "credit doctor," emphasized that missed payments stay on credit reports for seven years, causing the most "catastrophic damage." Other common credit mistakes include not tracking student loan accumulations and failing to swiftly recognize report inaccuracies like new accounts, hard inquiries or potential fraud.
"Thirty-five percent of your entire credit score comes from payment history. So lenders, right, when they're evaluating you as a potential borrower, and they're determining what kind of an interest rate they're going to be giving you, they're looking to see your payment history," Smith said.
"And if you have lates and if you have blemishes and you have missed payments, not only is your score tumbling down, but you look very, very risky to lenders," she warned. "And underwriters are going to be more likely to decline you because recent missed payments is an indicator of a problem."
"I feel like we were really set up to fail during COVID because so much money was pumped into the system, and it got people pumped up to a point where it was just a false inflation, it was a false sense of security. And now that the actual burden of paying all of our bills and paying them on time is truly on us, I feel like we're really put into a situation right now where it's going to be tough to dig out of."
The biggest misconception around credit is that paying off debts will automatically boost your score.
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"I would say probably at least half of our clientele believes that, 'I paid this off, I had a derogatory item on my credit report, I paid it off. Why isn't my credit better? Why didn't it go away?’" Smith claimed.
"Most of the time what you're seeing is a reactivation of the debt… the newer it is, the more impactful it is to the credit score. So the problem is, say you have a 5-year-old collection, let's say it's $100. It's causing very, very little damage to the credit score because the older it gets, the less it impacts you. So if you pay that $100 collection that's five years old, well now you have a brand-new collection on the credit report. It's a zeroed-out collection, and now all of a sudden your scores drop," she said.
"They pick it up as a brand-new collection. And now what's going to happen is, it's going to stay on the card report another seven years."
Smith recommends keeping an average credit score of 760 or higher, always being aware of what your score is at any given time, and using updated-daily credit institutions like Experian and Credit Karma.
"You can't track what you can't measure. And the amount of people that don't know what their credit looks like is astounding… you need to be shooting for 760-plus because anything less than that, you're doing yourself a disservice. You're overpaying for everything, including your car insurance," she said. "The No. 1 thing you need to do is be informed, be aware, and if you see something on your credit report that you don't recognize, that just seems a little bit off, that's when you want to bring a professional into play."
Building strong credit is substantially easier than repairing bad credit, Smith admits, but many consumers don’t know that up to 80% of derogatory items are reported inaccurately, which violates the Fair Credit Reporting Act and can be corrected to restore your score.
"That's what we bank on to try to help clean these things up, because, again, it's causing more damage than what it actually should be. And so, cleaning it up though can be very challenging because you're going up against the credit bureaus, who are for-profit entities. They're extremely busy and there is quite the process to even getting your letter to a real live person," Smith expanded.
Given recent stock market volatility creating panic among investors and average Americans, the credit expert sympathized that it can be a "stressful" time, but it’s more important than ever to avoid late or missed payments of any kind.
"History always repeats itself. And so we are going to come out of this and things are going to recover and they're going to recover very, very well," Smith encouraged. "So, when it comes to that side of things, just let it be, ride the wave, right? Don't panic. Don't sell everything."
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"With credit at this point, the biggest thing that we're seeing is please, please, please just make all of your payments on time… in these types of markets, any excess that you have, this is a great time for you to be putting money in," she added. "I want you to know there are so many amazing professionals out there who want to see you succeed and will help you succeed. And don't try to do it by yourself."
"You're only as sick as your secrets. Don't keep this to yourself. You need to talk about it. You need to share it with someone who can help you find a solution."