Your Credit Score – It’s Not Just About Credit

What is a credit score? Most people see it as a reflection of your creditworthiness, a number that helps potential creditors decide whether or not to give you credit, and how much to charge if they do.

In one sense, they’re right. It’s certainly the truth – just not the entire truth.

Anyone who sees a healthy credit score as nothing more than a means to an end is, to an extent, missing the point. Of course it matters if a creditor won’t extend you credit – but what matters a lot more is why they won’t.

WHY WON’T THEY LEND ME MONEY?

When creditors turn you down, it’s probably a sign you need to work on your finances. Assuming, that is, you applied for ‘reasonable’ credit. You’ll never find a $500,000 loan to buy a yacht on a $35,000 salary, but if you’re turned down for a credit card with a modest limit, it’s probably time to sit down and work out how you can earn more, spend less and / or generally pay off as much debt as possible.

(Of course, you might be turned down because some of the information on your credit report is inaccurate. You have the right to have it corrected, so start by getting in touch with one of the credit bureaus (Equifax, Experian, and TransUnion) and asking for your credit report.)

WHY SHOULD I WORK ON MY CREDIT SCORE?

When you improve your credit score, you’ll also achieve something that’s arguably far more important – you’ll improve your overall financial health:

1. Raise your income and you’ll set yourself up for a more prosperous future.
2. Get used to spending less and you’ll reduce your chances of getting into financial trouble.
3. Reduce your debt and you should reduce your monthly expenses and / or hasten the day when you’ll be debt free.

A credit card debt, for example, might only cost a few dollars per month, but paying it off slowly is a good way to ensure you’ll pay (much) more in the long run. You can find all kinds of ‘credit card calculators’ online: just spend a few minutes trying out different repayment amounts and you’ll be surprised at how much difference a few extra dollars per month can make.

Whenever possible, it’s well worth making short-term sacrifices to get rid of debts (particularly high-interest debts) as soon as possible. You might find some professional debt advice can help you understand your options and identify the best way to reduce / eliminate your debt.

WHY NOW?

It’s always time to work on your finances. Even when you’re debt free and paying all the bills on time, you can always improve your financial situation (and as a result, your credit rating) by saving more, investing, overpaying the mortgage…

In a credit crunch, however, it’s more important than ever. When all kinds of people are finding it hard to get credit, anyone with a ‘checkered’ credit history might find it just about impossible.

More to the point, any kind of credit crunch / housing market crash / recession can threaten everything from your bank account to your job and your house. A lack of financial stability can make all the difference between a short-term set-back and complete financial disaster.

Whether you’re congratulating yourself on building up a ‘reserve’ of cash to see you through this economic downturn or promising yourself you’ll be better prepared for the next one, times like these really show just how important it is to keep your finances – and your credit score – in good health.

References:

Here are few good quality debt related articles: Red buff Musings

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