Personal Credit Advice
Bahir Jessie • May 6, 2024
Personal Credit Assessment
The process of using credit to your advantage begins with an evaluation of your current credit profile. To start, print your credit report with the FICO Score, monthly budget, and bank statements. In conducting your personal credit assessment, you need to ask the following:
- Are you managing your checking and savings accounts well, never spending more than what’s in the account? Overdraft fees are not only costly but indicative of your inability to manage monthly income and expenses. A monthly forecast of income and expenses helps assign purpose to the money you’re projected to earn. A daily review of your accounts and a weekly review of your budget will give you time to make adjustments and help execute your financial plan. If you’re not checking your banking and investment accounts daily it will be difficult to achieve your daily, weekly, and monthly financial goals.
- Are all of your bills paid on time? Responsible debt management of all bills is essential to establishing and maintaining good credit. If there are any issues contact the company and work out an arrangement with them directly.
- Are you spending more than you make? Going to the store and planning to purchase an item prior to receiving income will lead to debt and a mismanagement of income. If you don’t have 6 months of income in savings, an emergency fund, or investments for retirement, allocating money towards consumer purchases should not be a priority. It’s important to plan your big purchases. However, if the consumption is not in line with your financial strategy for saving and investing it inhibits your long-term financial success. Address your behavior and change it.
- Are you paying less than 10% of your monthly income on credit card debt? Is your total debt less than 20% of annual net income? The standard rule is to never borrow more than 20% of your annual net income.
Signs of Good Credit
Determine where you are in the journey of establishing exceptional credit and apply the appropriate strategies to achieve this goal. If you’re making much more than the minimum payment on credit cards, paying your bills on time, never missing a payment, borrowing well below your credit limit, or have paid off all of your consumer debt obligations, it’s a good sign that you have established good credit. As a result, it will be easier to borrow, servicing fee expenses for past dues and late payments are avoided, and you save money on interest.
Signs of Bad Credit
Signs that you have bad credit are behaviors consistent with paying below the minimum on your credit card, paying bills too late, charging over your credit limit, and having too much debt. It takes you 60 to 90 days to cover bills that need to be paid monthly and you’re juggling payments between creditors to keep them satisfied. Bank checking account is always overdrawn, you bounce checks and you scramble to make deposits. Any reduction in income or an unusual expense will make it difficult to cover your monthly expenses and pay bills. Credit card balances are at their maximum limits with these balances remaining the same or increasing over time. You are still paying off credit card charges you made over a year ago. Fighting with family and ignoring the phone are other signs of debt issues.
Bad credit means you’re going to have a difficult time borrowing money, if approved for a loan you will spend a lot of money on interest, you’ve likely paid late fees on past due payments, and the cost of doing business has increased given your negative reputation regarding repayment.
Understanding what factors affect your credit score helps with creating a strategy to continually improve it. While some are chasing the elusive perfect score of 850, the key is to actively find ways to improve your credit profile and avoid the traps that lower your credit score. The easiest way to improve your credit score is to pay all your obligations and bills on time. Delinquent payments and collections have a severely negative impact on your FICO Score. If you’ve missed payments, you must get current on your debt obligations and stay current. Those current payments will move the past due payments off your credit report and improve your score. Paying off a collection account will not improve your credit score. If you can call the initial owner of the trade or obligation and negotiate getting this off your credit report, then pay. However, if the lender does not agree with a written notice that they will no longer report the trade as a collection account on your credit report, do not pay. The collection companies will take your payment and then sell your personal information to the next collection company who will then ask for the same payment which will never come off your credit report. If the collection account is an error, you need to contact the three credit reporting agencies and dispute the information. If the collection account information is accurate, you should wait seven years until the collection status falls off the report. If there is an event that makes it difficult to uphold your financial obligations contact the creditors directly and ask for help. They may close the account and place you on a program where the payments have been decreased but you will at least be able to maintain your credit score. Once back on your feet you can resume the normal payments. Another way to improve your credit score is to maintain outstanding balances equal to or less than 30% - 50% of the limit on all credit cards. As previously mentioned, high utilization lowers your credit score. In addition to maintaining low balances on credit card debt, pay off as much debt as possible while keeping the trade lines open. Do not close the accounts as it will reduce your credit availability and lower your credit score. Obviously use discretion because if there is an annual fee it should be closed given the availability of several credit products that do not require an annual fee. Also, do not open up several credit lines at once just to increase your credit availability. I advise you do this gradually. Opening a number of new credit cards you don’t need all at once will only hurt your score and ability to take advantage of 0% promotional interest which can be extended over a significant period if done strategically. It’s important to function with as little retail or consumer debt as possible. Low utilization boosts your credit score. If you’ve had trouble maintaining your credit and want to re-establish or improve your score, open one credit card and pay the balance off in full every month. Do not spend more than you have allocated for full repayment. If the card commitment amount is $500.00 charge $250.00 on the card and pay the entire balance off within the billing cycle. There will be no interest charged to the purchase since the outstanding balance was paid off within the billing cycle. This will help to re-establish your credit and improve your score. As your credit availability for this card grows from $500.00 to $1,000.00 use 40% to 50% ($500.00) and pay it off at the end of the month. It’s not required that you continue to borrower each month. However, consistent and responsible usage of debt will continue to increase your availability and improve your credit score. As mentioned, a diverse credit mix shows that your ability to responsibly manage multiple forms of debt. Therefore, your credit score improves as you continue to manage different types of credit obligations. However, this does not mean you need to find different types of loans to apply for to improve your score. This is not a reason to get into debt. The intent is to obtain an exceptional credit score and then move from using debt to cash or a debit card. The end goal is to have no consumer debt at all.
The credit scoring system was created to make it easier for both the customer and lender to make decisions regarding products and provide some symmetry within the lending community on how to process requests for credit. The credit score attempts to give lenders a fast and objective measure of your personal credit risk. It is designed to be a consistent metric which looks to eliminate a slow archaic manual process that has historically been inconsistent and bias. A credit score can be delivered instantaneously allowing for verification of your personal information and expedites the credit review and approval process for most retail products and services. Many retail credit decisions can be made within minutes, depending on the lenders policies and procedures, including mortgage pre-approvals. The score is reflective of an individual customer’s willingness and ability to repay debt. Most lenders have a minimum credit score requirement. An efficient credit decision process is better than dragging someone through an extensive process which renders the same decision. A streamlined credit process saves time, money, and eliminates frustration. Another benefit of having a credit scoring system is speed to market for customers who shop online. The transition by consumers from brick and mortar retail shopping to buying most of their products on the internet led to the most profitable cyber Monday in U.S. history and is reflective of our preferences for convenience. Internet Banking and the ability to apply for loans to purchase products from your favorite retail stores has made the use of a personal credit score that much more important. In many instances, companies may even direct existing and new customers to an online webpage for information on products and services or to complete a credit application. In using the credit scoring system, lenders can focus on the facts related to credit risk instead of personal feelings about the applicant. Using a system that restricts bias based on protected categories makes the credit approval process fairer. In addition, having a reporting system where past delinquencies and poor performance will not remain on a personal credit file forever is important and allows the individual the opportunity to grow past earlier mistakes. Therefore, previous credit mistakes fade as time passes and recent payment patterns report good standings. More significant items like bankruptcy, judgments, foreclosures, collection accounts, and adverse public information will remain on a personal credit report for seven years. As stated in Deuteronomy 15:1, “At the end of seven years thou shall make a release”. Lenders who use credit scoring can approve more loans as credit scoring provides precise information on which to base credit decisions. It allows lenders the ability to identify individuals who are likely to perform well in the future despite any previous issues showing on the credit report. Credit scores give the lender confidence in extending credit as they have access to your full report and risk metrics that assist in making credit decisions. An automated credit process which includes the credit scoring system, makes the lending process more efficient and less costly for lenders who in turn pass on those savings to customers.
Relationship opportunities which provide the best possible outcomes for gaining wise counsel in pursuit of your financial objectives are those with bankers, financial advisors, financial planners, wealth management advisors, financial brokers, real estate agents and brokers, insurance agents and brokers, attorneys, business owners, and investors. Bankers should have a thorough understanding of all the products and services provided by the Bank to help you accomplish your various financial goals. Bankers answer and submit requests for credit, manage client accounts, handle client complaints, and suggest specialty products tailored to your current financial situation and level of financial sophistication. Financial advisors have Series 7 and Series 63,65, or Series 66 and act as a fiduciary with the responsibility to act in the client’s best interest when guiding clients toward products. They are legally and ethically bound to put their client’s best interest ahead of their own. The Series 7 allows the solicitation, purchase and sale of all securities products including stocks and bonds, mutual funds, money market funds, unit investment trusts (UITs), exchange-traded funds (ETFs), options, municipal securities, and hedge funds. The Series 63 and 65 allows advisors to sell securities in most states. The Series 66 is for those who want to become investment advisor representatives and is equivalent to having both a Series 63 and 65. Financial planners are employed to create a plan to help their clients reach long-term financial goals. Financial planners provide a broad range of financial advice but may also specialize in investments, retirement, and estate planning. When seeking a financial planner make sure the person has a history of helping clients achieve the specific financial goals you’re employing them for and has provided advice to clients with similar needs. Wealth management advisors are similar to financial advisors but their advisory services are specific to high net worth and ultra-high net worth individuals and families. Wealth management incorporates structuring and planning for the purpose of growing, preserving, and protecting wealth. Wealth management strategies include estate planning, business succession, and stock-option planning. Financial brokers act as an intermediary between the investor and a securities exchange since the exchanges only accept orders from an individual or firm who is a member of the exchange. The best online broker for beginners with the best mobile application is TD Ameritrade. The account minimum is $0 for stock and ETF trades and $0.65 per contract for options trades. In addition to executing orders, brokers provide investors with market research to help important investment data on various securities. Real estate agents and brokers are interchangeable in regards to their actual duties and responsibilities but differ in compensation. Real estate agents are licensed to help people buy and sell real estate and paid a commission at closing. A Broker is licensed to help people buy and sell real estate but may do so independently and can employ real estate agents. Brokers are paid a commission at closing but also get a percentage of the deals their agents close. Licensed real estate professionals are very helpful when looking for all property types and have access to information, property listings, and properties hitting the market. Licensed insurance professionals provide a list of products to protect you and your assets but also can be a strategy for creating and passing on wealth. Independent insurance agents provide advice on insurance products that fit your lifestyle and work with a variety of insurance companies with different coverage options to fit your individual, business, and family needs. Business owners and investors have the experience in structuring deals and running profitable businesses. They have strong relationships with banks and have access to alternative financing options. Business owners and investors will tell you what works and put you in the best situation to succeed. They’ll also candidly share their mistakes and any ambitions that are unrealistic. Attorneys, especially in business, wealth management, securities, and real estate, are pivotal to your future success. An attorney will help you choose the proper business structure when creating your company, reduce exposure to lawsuits, draft business contracts with counterparties, protect your physical and intellectual property, and review all the terms, contracts and business agreements.