Can you prove that you know what you’re doing and can be trusted with money?
Believe it or not, there is a “certificate” out there in the world with your name on it that tells everyone else exactly that! It tells people how much you owe and whether you are over extended. It tells them whether you are a good payer of your debts and whether you pay on time and the right amounts. It even tells them who you are associated with and whether those people are good at managing their money or are a bit dodgy on the financial repayment front. Fair or not, you may get a little negative mark next to your name for each financial indiscretion your spouse or house mate makes which will impact your financial reputation.
And this certificate is exactly why there’s some truth to the old adage that the rich get the best deals (meaning, actually, that the people who understand money get the best deals). A key part to understanding money is having a great Wealth Health Certificate – otherwise known as your credit score.
Your Credit Score is the fifth tool of the Five Tools for Wealth detailed in The Wealth Chef Book.
Your aim is none other than to have the best credit score in the class! Just imagine being the person who the banks offer the lowest interest rates on borrowing, cheaper car insurance and better financing deals .With a great credit score you also have significantly more negotiating power, and this will soon be you, because Wealth Chefs know how to create and keep their score high.
Why You Must Know Your Status
You must know your credit score! The better your credit score, the less interest you have to pay, and understanding compounding you’ll know that even a 0.5% point in interest over time, makes a huge difference.
You may recognize the term “credit score” but perhaps have no real idea exactly what it is and what it means to you. Well, whether you know it or not, just about every bill you pay is tracked by the two main credit bureaus: Equifax, TransUnion and Experian. They have a big file on you! In it, they keep information on how well you pay your bills on time, how much debt you have, who you hang out with and also how good you and your associates (what they all them) are with their credit!
All this information is then thrown into a huge financial food-mixer and out the other end pops your personal credit score. The score is based on a risk measure invented by a company (Fair Issac) and is called the FICO credit score.
What Is A FICO Score
The FICO score is a numerical number which lets companies know how good or bad a credit risk you are. It ranges from 300 (very bad) to 850 (you’re a credit angel). All credit bureaus use this scoring method as a basis and then just tweak it a little, according to their own system.
Your Score Impacts Many Things
When you apply for a credit card, a loan, car financing, a mortgage or a phone contract, the relevant company will take a look at your credit score to see how responsible you are with your debt. Landlords also use credit scores to see if you’ll be a reliable tenant. Even insurance premiums are be influenced by this score.
If you’ve got a great score – in other words, you’re really good at paying on time and haven’t extended yourself to use all your available credit and also don’t apply for credit too often – then they’ll most probably be delighted to do business with you and offer you a good deal. The better the score, the more companies will want to help you (it’s in their interest!), offering you sweet deals. This means lower interest rates on your mortgages, car loans and credit cards.
The bottom line is, you want to know your status.
Wealth Chefs know their score and keep it updated.
In almost every country now, you’re entitled to get your credit score from each credit agency, once a year, for free – so, use it!
How To Get A Great Score In Six Easy Steps
There are six easy steps to getting your credit score and keeping it healthy.
- Get your credit score and see what everyone’s saying about you: google Equifax, Transunion and Experian (or just credit score agencies and your country) and get your score now. In most countries, you’ll be able to see it almost immediately online.
- Fix the typos. Given that your credit record spans nearly a decade of your borrowing activity, it’s no surprise that errors sometimes occur. Some common credit-reporting blunders include: out-of-date addresses, closed accounts being shown as open, and downright false information.
- Mend your un-creditworthy ways, NOW! Those self-inflicted credit wounds (such as a history of late payments, defaults, and generally bad credit behaviour) will fade from your record over time. You won’t be able to wipe out accurate information from your credit report (nor can any firm who offers to do so for a fee, no matter what story they spin, by the way!)
Since your most recent behaviour carries more weight than old news, vow that from this day forward you’re going to be a financial Goody Two-Shoes! This means paying your bills on time, every time, and keeping your debt level low, compared to the credit available.
- Memorize the mantra: it’s plastic, not cash. A credit card is just that, a credit card. Even though you’ve been deemed worthy by some entity to borrow $50,000 doesn’t mean you actually have $50,000, nor that you now need to go and spend $50,000!
- Ignore bankers’ and other lenders rules on what is an “acceptable” level of debt. Your debt-to-income ratio is the measure of how much debt you carry, to how much money (after taxes) you have coming in.
In the world of lending, it’s acceptable to carry 25% of your income in debt. You should only ever use this ratio for good debt (you’re only going to consider good debt, once you’ve proved yourself to be a great Wealth Chef by eliminating all your bad debt!
Rinse and repeat. You can see that fancy manoeuvres are not what you need to keep your credit looking spiffy and your Wealth Health in tip-top shape. Just keep your spending under control, pay your bills on time, don’t apply for extra credit too often – and then, don’t be shocked when you find yourself among those with elite credit-score status!
So, there you have it.
In the comments below I’d love to know:
- Have you gotten your credit score?
- Were you surprised by what was on it?
Remember your credit score is a reflection of your PAST money flow patterns and you can make incredible strides in improving it quickly with focus and taking the actions above.
Remember too that your credit score is not a reflection of who you are! Many people spend so much energy trying to improve their credit score so they can borrow more instead of focusing on increasing their Net Worth and creating real wealth.