Empower yourself with education to unleash choices and power
Understanding and managing your finances, especially the information that may be contained in your credit report, can be a daunting task.
Even if you have experience in the financial industry, your choices and the impact they can have on your credit report can be confusing.
Here are a few of the more common beliefs and misconceptions coupled with responses that will serve to set the record straight.
Belief: Cash is king; I have great credit because I pay cash for everything
While it is a great idea not to buy things that you cannot afford, you have to actually establish and use forms of credit in order to earn a credit score. The more often you demonstrate that you are responsible with the credit that you have been granted, the stronger your score will be and the better access to credit you will have.
There is a happy medium here. It is not a good idea to try and establish all of your credit all at once and you certainly want to avoid opening up and trying to maintain too much credit. A typical credit report will often contain a mortgage trade line, one or two auto trade lines, and two or three credit cards along with whatever previous credit you obtained and paid off or otherwise closed. Establishing this type of credit will ultimately help you to build up your score as you make timely payments and pay down your debt levels while maintaining available credit sources. As your credit history builds so will your score.
You should still use cash when it is comfortable for you to do so, just don’t expect to build up your credit score without first establishing a credit history.
Belief: The most important part of my credit report is my score
Everything contained in your credit report is important and personal to you. In addition to the names of your creditors and the balances that you owe them, information contained within your credit report includes your Social Security Number, your date of birth, your home address, and your place of employment.
You should monitor your credit report regularly, if for no other reason than to ensure accuracy. The information that everyone, from a potential lender to a potential employer, will look at with the most interest, however, is your score. Today, in our quick answer-immediate response world, your score is the single most important factor in determining whether or not you will be approved for that loan or, in some cases, be granted a job interview.
There are many scoring systems, at least one for every credit bureau, but they all have one thing in common. The higher your score, the better off you will be. Your cost of borrowing will be lower and you will have more options from which to choose.
Belief: I don’t have any control over what my credit report says
Nothing could be further from the truth. The data included in your credit report is a recording of your decisions, payments, requests, and overall handling of the credit you have sought and/or gained. It is your duty to act responsibly with the credit extended to you just as it is your duty to make sure all of the information on that report is accurate.
Belief: I will hurt my credit score if I meet with a Financial Counselor
Response: Both fact and fiction
Simply meeting with a Financial Counselor will not have any impact on your credit report, whatsoever. Keep in mind that you have to share certain data with a creditor or any company that reports information to a credit bureau in order for that transaction to show up on your credit report. It is a good idea to understand what, if anything, potential creditors or financial professionals are going to do with your information before you do any business with them.
If you decide to employ a Financial Counselor and you give them permission to act on your behalf in re-structuring or reducing the amount of debt you owe a creditor or a group of creditors, those actions could very well have a negative impact on your credit score. Even if you reach a mutual agreement with a creditor who allows you to settle with them for less than what you owe them or to pay them over a longer period of time than what was originally agreed, that creditor will almost certainly report that information to the credit bureau and that data will cause your credit score to drop.
If you have made some bad decisions in the past and those decisions have had a negative impact on your credit score, meeting with a certified financial counselor may be the best thing that you can do for yourself even if the actions that you need to take have an additional negative impact on your credit.
If you take the time to understand what you have done or not done to contribute to your situation and you are willing to hold yourself accountable for your actions going forward, employing a certified financial counselor may be your best avenue to move forward on positive footing.
Belief: The more money I make, the higher my credit score will be
Your credit score really doesn’t have anything to do with how much money you make. One of the measurements that influence your score is the amount of debt that you have, but your income has no direct impact on your score. If you make a minimum wage, but you make loan payments as agreed, you can have a credit score that equals or exceeds maximum wage earners who may or may not manage their finances as well as you.
Belief: I don’t have enough money to hire a Financial Advisor
Reputable Financial Advisors can be helpful in virtually any financial situation from establishing a college fund through retirement planning. You can establish an investment plan for very little money and begin habits that will serve you well throughout your life.
While some professionals may cater to a wealthier client base and charge accordingly, the vast majority of Financial Advisors are very affordable. Many are paid through the commissions and fees that you are already paying on your investment accounts.
Lastly, please remember that the best way to manage your finances and the information contained in your credit report is to take an active role in the process. Review your statements. Ask questions when you don’t know the answer. Obtain your credit report for free from one of a multitude of websites offering that service. Make sure that everything is accurate and, if something doesn’t look right, take immediate corrective action.
If you make the commitment to yourself to prioritize your personal financial management and are willing to do the work that is necessary to understand your finances and then make good decisions that are consistent with your short and long term financial goals, you will immediately begin to establish good financial habits. Once you do this, you will have more choices and more control over your finances and, therefore, more power.
This article is part of Scott Arney's educational series, entitled The Serial Decision Maker.