So you’ve decided that it’s time to take the bull by the horns and sort out your financial situation. Or maybe you feel you’re doing fine but you realize that you don’t have have a plan in place to ensure that you’re fully protected in case life happens. You think, “Time to get that done” but where do you start?
Lots of people will tell you that education is the first step. Education is always a good thing and I recommend it on an on-going basis, but in this case what does “education” mean? Should you read a lot of books? If so which books? There’s a bewildering array out there. Take a course? Which course? On which topic – investing, budgeting, asset protection?
Last week I asked my Facebook Page readers where they would start and I received some great answers:
- Pay yourself first – absolutely.
- Save before you spend even if it’s a small amount – very smart.
- Budget to allocate funds wisely – excellent.
Honestly, if you started with any of these you’d be well ahead of a good chunk of the population, which is great. I would argue though that while every one of these suggestions is essential there is another item that represents the first step in the process.
If we boil financial success down to the first key stepping stone, it all starts with a rock-solid credit profile.
When was the last time you heard an ad or a financial person ask you about your credit score, otherwise called your Beacon score in Canada? A surprising number of people that I talk to in my professional life and my personal life have no clue a) what a Beacon score represents and b) what their particular score is. I can’t say that I blame them. I don’t think I realized that I had a credit score until I was in my thirties. Other than mortgage agents and lenders, who talks about this? It’s not like it comes up at parties and BBQs.
Just as schools do not teach our children how to make, manage and grow money, we are not taught about this fundamental building block of financial literacy. And we are certainly not educated about how to develop a good score and which factors adversely affect it. This is surprising given the importance of a good Beacon score. Without it you will have few options available to you in a number of situations.
Why? Because that’s the way that the world measures how credit-worthy you are. If you live a 100% cash lifestyle and you never have to borrow money or sign up for any services then you will be fine. In all other instances your score will come into play and it will help service providers determine whether or not you represent a reasonable risk, which in turn will affect the number of options you have. If something should happen to your spouse and suddenly you’re on your own, it will be essential to have a good score.
A good score = options; a bad score = trouble.
Here is a partial list of the people or institutions who use your score to evaluate you:
- Lenders/banks, when you want to buy a house or get a loan of any kind. And, they keep checking for the term of the loan. If your score dips too low they can call in the loan or refuse to renew.
- Car companies, when you want to obtain financing. Unless you have a pocket full of cash to pay for that new or new-to-you car you’re going to need a loan from someone.
- Insurance companies, when you want to insure a house or a car. A cash lifestyle won’t help you here. They will refuse to insure you if your score is too low or they will charge you much higher premiums. You will pay dearly for a bad score.
- Employers – Some of them check to see how credit-worthy you are. It gives them an idea of your risk profile.
- Credit card companies check every time you apply for a card and they keep checking the entire time you have the card.
- Landlords – If you want to rent an apartment, you often have to give consent for the landlord to check your credit. They want to know that you pay your bills on time. No consent, no rental.
- Cell phone companies – We all love to hate them right? But the fact remains that the vast majority of adults (at least in Canada) have a cell phone. They pull your credit before agreeing to sign you up for a plan and they will be merciless if you don’t pay your bills on time.
One of my main goals with this blog and my Facebook Page is to help women become financially strong. A good credit score is one of the most basic elements to setting yourself up for success.
Do you need a good credit score to invest in stocks, bonds and GICs? No. How about investing in real estate? Yes if you want to be on Title but not if you want to lend money in the form of a money partner on a deal or as the second mortgage holder. Do you need a good score to set up a savings account? Again, no you don’t. So you can clearly save and invest in some assets without a good score but heaven help you if you ever want or need to borrow money. And you will at some point.
Think of your credit score as the foundation to your financial house. With a strong score you can build a large financial structure and you have options when trouble hits.
In my eBook entitled “5 Ways Women Can Move From Financial Sabotage to Financial Success”, I talk about the 5 key areas to master with respect to money: Know, Make, Manage, Grow and Protect. Your credit score falls into knowing where you’re at and protecting yourself. I wrote this post with all of the details about credit reports and scores: what they are, where you can obtain them, what a good score looks like and which factors influence that number. I recommend that you read the post to learn about all of the elements of a good score. Here is a very brief overview:
- Have a Beacon score greater than 680. (This applies to Canada. If you’re from another country then I suggest that you look into the details for your credit reporting agencies.)
- Have at least two trade lines (i.e. credit cards, loans, etc) with a $2,000 credit limit each. You can have a higher limit if you like but it’s not necessary. With a higher limit I ask only one question: How are you using that credit? If the answer is “wisely” then terrific. If not, you may want to rethink the credit limit and ask for a decrease.
- Keep your balances below 35%. Better yet, do not carry any credit card debt as it will erode your wealth with those crazy interest rates.
- Pay all bills on time every time. No exceptions to this one.
Really though, read the whole post.
So what sorts of things hurt your credit score? Here’s a quick list:
- Spending more than your credit limit and carrying high balances.
- Paying late. Automate all payments to ensure that you never miss a bill.
- Too many inquiries on your file.
- Collections. You can argue about a bill all you like but if you don’t pay it the company will likely send it to collections or report it directly to the credit reporting agencies and it will show up on your bureau. Then it stays on your bureau for years. Cell phone companies are notorious for this. Pay the bill and then fight them. Frustrating, I know, but that’s how it works.
For a full list with many examples, you can read the eBook that I published. Email me and I’ll send you a free copy.
In future posts I will talk about the other critical areas that I mentioned above. For now, start with your credit bureau report. I recommend that you get in the habit of pulling it once a year and checking it carefully to ensure that it is accurate. When that’s in order, you will be ready to built a substantial financial house. If you’ve experienced some tough spots that have damaged your credit don’t give up. Every single credit issue can be fixed with time and determination. It’s worth the effort.
Until next time, Survive, Thrive and Grow!