How to build and establish credit in the Hispanic community

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Although 83% of U.S. adults had a credit card in 2020 according to the Federal Reserve, the breakdown reveals existing credit card disparity. When CreditCards.com compiled data to analyze credit card access by race, gender, age and income level, we learned that 87% of white consumers, 72% of Black Americans and 76% of Hispanics had at least one credit card in 2020.

While the majority of Hispanics have credit card access, it’s still below the average across U.S. adults, and this kind of credit access inequality can lead to other types of financial inequalities, such as lower credit scores and higher interest rates. Data from a recent Urban Institute study indicates that in October 2020, white Americans had a median credit score of 725 while Hispanic Americans had a median credit score of 661. That’s the difference between good credit and fair credit, according to the FICO scoring model.

With fewer opportunities to build credit comes fewer opportunities to build the kind of financial literacy that can help you save money, get (or stay) out of debt and build a positive financial future for you and your family.

“The Hispanic community often has limited access to credit-building opportunities, which include building and maintaining a healthy credit score,” explains Jen Hemphill, an accredited financial counselor (AFC®), Latina money expert and host of the podcast Her Dinero Matters. “Because of that, they don’t have an understanding of how the U.S. credit system works.”

It’s important to note that not all members of the Hispanic community have the same financial experience in the United States. “With Latinos or Hispanics or the Latinx, there are different segments,” Hemphill explains. “Recent immigrants, second or third generation, and so on. Depending on the subgroup, the needs and the understandings and the adaptation to U.S. culture and the credit system vary.”

That said, here are some of the easiest ways for members of the Hispanic community to improve their finances and access to credit.

Finding financial solutions

“There are multiple challenges for Hispanics in the United States, such as legal status and obtaining a tax ID,” explains Maria Victoria Colon, a certified public accountant, money coach and the creator of the social media movement Hablemos de Dinero en Español. “These challenges also include financial literacy and language barriers.”

What are some of the biggest financial problems facing the Hispanic community? “In regard to getting a line of credit and achieving good credit history and score,” says Colon, “the main challenges are access to high quality financial products and tools with resources in Spanish.”

Colon notes that many of the financial tools and resources specifically offered to the Hispanic community are associated with high-interest products. This can be as relatively benign as a store credit card with a higher-than-average interest rate or as potentially dangerous as a predatory loan. If you don’t understand how interest rates work, you might find yourself applying for a loan or credit card that could cost you a lot more money than you realize.

“One of the biggest challenges Hispanics face when it comes to getting lines of credit is the lack of information,” explains Claudia Valladares, chief of advisors at Kovar Wealth Management. “They don’t know where to start or whom to contact if they have questions. A lot of the times these individuals applying for credit are first generation, so they’re learning as they’re going through the process. They don’t have their parents to walk them through it; it’s actually the other way around. The unknown is probably what can hold them back or cause them to jump into a credit card that isn’t really for them.”

Building credit

Why is your credit score so important? Because it has the potential to affect many other aspects of your life. “Your credit score impacts more than your ability to get a credit line,” says Hemphill. “It impacts interest rates, getting a home, renting, not being denied a cellphone plan, employment, even your mental health.”

Building good credit isn’t just about improving your own finances. Good or bad, your credit score has the potential to affect everyone else in your household. “It can affect relationships,” Hemphill explains. “Maybe you have good credit and your partner has bad credit, or vice versa.”

If you don’t know whether you have good credit or bad credit, start by checking your credit score. There are many ways to check your credit score for free online, even if you don’t currently have a credit card or bank account. Use the free online resources to find out whether your credit score is considered poor, fair, good or excellent – and be prepared for the results to surprise you.

Once you know your credit score, it’s time to learn how your credit score is calculated and how you can use that information to improve your credit score. The FICO credit scoring model, for example, uses the following five factors to determine your credit score:

• Payment history (35%)
• Credit utilization ratio (30%)
• Length of credit history (15%)
• Credit mix (10%)
• New credit (10%)

This means that one of the quickest ways to improve your credit score is by making on-time credit card payments. You can also improve your credit score quickly by paying off your credit card balances (if you already have a credit card), which lowers your credit utilization ratio and boosts your score.

What if your credit score is low because you haven’t had the opportunity to use credit yet? Unfortunately, being credit invisible – having no visible credit score – can severely limit your opportunities to obtain new credit. “Credit invisibility is one of the financial challenges facing the Hispanic community,” says Hemphill. “It puts them in a position of being targets for predatory lending.”

Members of the Hispanic community who want to build their credit but find themselves with limited options might want to consider secured credit cards. These cards require a small security deposit, but they are often more accessible to people who have no visible credit history or who have previously damaged their credit, such as through excessive debt or missed payments. Once you have a secured credit card in your wallet, make small purchases every month and pay them off in full to build a positive credit score.

“Using secured credit cards is a great way to build your credit!” says Valladares. Not only do secured credit cards give you the opportunity to build your credit score, but the relatively low credit limits also give you the chance to practice using credit responsibly. “There are some people who fear opening any kind of credit card because they fear they will spiral into debt. Secured credit cards give peace of mind since you won’t be able to use more than you have set as your collateral.”

Managing and avoiding debt

Building a good credit score is only one part of using credit wisely. The other part involves managing and avoiding credit card debt.

“In some of the workshops that I teach, I’ve had people tell me that they’ve been to the bank to apply for a credit card,” says Hemphill. “The bank tells them that if they want to build their credit, they should make the minimum payment on their credit card. The banks aren’t telling them to pay off their credit card in full every month. Can you build credit that way? Absolutely. But they’re building credit at a cost.”

This cost includes not only the interest charges associated with carrying a balance on your credit cards, but also the possibility of watching your credit score drop as your credit utilization ratio increases.

What advice do credit experts have for the Hispanic community? “Only use credit for items you can pay [in full],” says Colon. “The best thing for our credit is to have a long and clean history; all payments made on time and credit card balances low.”

If you already have more credit card debt than you can pay off in full, consider using a balance transfer credit card to consolidate your credit card balances and pay them off. The best balance transfer credit cards offer at least a year of 0% APR on transferred balances, giving you time to pay off your old debt without accruing interest.

You might also want to consider making a budget to help you put as much money toward debt repayment as possible. The faster you pay off your debt, the less money it will cost you in interest charges – and the more opportunity you’ll have to reap the benefits associated with debt repayment, including an improved credit score.

Finding Hispanic credit unions

One of the best ways for members of the Hispanic community to learn more about the financial opportunities available to them is by seeking out Hispanic credit unions. These organizations not only provide much-needed banking services, but they can also help people build financial literacy skills.

“Hispanic credit unions are a great alternative to regular banks, and they most likely have all the information available in Spanish,” explains Colon.

Not only do Hispanic credit unions connect people with multilingual staff, but the connection often goes deeper than the ability to communicate in Spanish. By giving members of the Hispanic community access to financial representatives who understand their culture and their unique needs, these credit unions provide experts who literally speak your language.

“Since these banks focus on the Hispanic community, the Hispanic community will feel more comfortable banking there,” says Valladares. “They will be able to ask those questions they are usually afraid to ask and actually seek financial help.”

If you’re interested in finding a Hispanic credit union near you, the National Credit Union Administration maintains a database of organizations that serve minority communities in the United States. Use this information to find a Hispanic credit union that can help you achieve your financial goals.

“Look for financial institutions that offer products with competitive rates, low or no banking fees, and easy access to their systems, both online and in person,” Colon advises.

Accessing financial resources for Hispanics

How can you find additional financial resources? Start by looking for reputable organizations that are specifically working to empower the Hispanic community. “Go to places that are doing well and that are serving the Hispanic/Latino market,” says Hemphill.

Colon agrees. “Request a translator [if needed] when making any financial decisions, and always go to a reputable institution.” If you need one but an organization won’t provide a translator, it’s probably not the best resource to help you meet your financial needs.”

Hemphill also suggests finding reputable online resources, especially the financial resources offered by the Consumer Financial Protection Bureau. “The CFPB does a really great job of breaking down the information. They have their website in all sorts of different languages, Spanish included.”

As you continue to build credit, don’t forget about taking advantage of the kinds of financial resources and opportunities offered to people with good or excellent credit scores – whether that means applying for a top rewards credit card, refinancing your mortgage or using a low-interest personal loan to consolidate and pay off any outstanding debt.

Then, you can use what you’ve learned to become a financial resource to another member of the Hispanic community – and to help somebody else access the same credit-building tools and information.