By Cindy Diccianni RN, CSA, CLTC Financial Advisor
Special to NurseZone
The last several articles have been on the basics of credit and how they play a major role in all of our lives. In this article I would like to recap what we have learned and summarize some of the key points.
The Big Picture
The credit world is a never-ending cycle of borrowing and lending money that people do not necessarily have now but expect to have in the future. As a result, our society has a lot more “buying power” than good old-fashioned cash. As long as the borrower pays their loans and the lenders lend, the system will stay finely balanced.
Credit is highly personal because it is a reflection of you. Your credit profile doesn’t make you a good or a bad person, but it does make you a good or bad credit risk. It is a snapshot of both your financial and personal integrity. Maintaining a good credit rating is a critical factor for getting the best interest rates on loans and having access to additional monies when you need it.
The System
Every time you apply for credit, use your credit card, or repay what you borrow, your credit history is recorded for all other lenders to see. The credit reporting system is crucial to both borrowers and lenders. Since most lenders don’t personally know their borrowers, they depend on the bureaus to provide reliable, independent verification of your creditworthiness. And with the advent of computers, this information is available immediately.
Protecting Your Credit
Your credit report is not always an accurate reflection of your credit activities. With virtually millions of entries daily, it is very easy for the information entered to be incorrect or for errors to occur. Remember to take advantage of your free credit report. To obtain the information go to
www.freecreditreport.com, or do a search of the credit reporting agencies. Your credit score should be 720 or above to get the best rates on loans and borrowed money. If your returns are below this number, it is time to fix your credit history. This can be done in many ways such as closing old credit cards with no balances, reducing your credit by paying off cards, saving more, borrowing less, etc.
Loans
The main reason for having good credit is to get a loan when you need it and to do so on your terms. A loan can be large or small; it can be instantly available through a credit card or bank account, or it can require your signing a complicated set of documents. Every loan covers these key points:
How much you can borrow
How much it will cost
The payments schedule
What happens if you do not repay the loan.
There are several types of loans that you can obtain such as a home loan, car loan or general-purpose loan, and they can be for a specific purpose including consolidating debt or accessing lines of credit.
Credit Cards
Prudent use of your credit cards is the first step to either getting out of debt or never getting in credit card debt at all. These cards are an authorization of credit or proof that someone has given you credit. By using a card, you tell a seller that you are guaranteeing payment for the goods through a third party-the lender. The good standing that a card lender gives you can quickly go away if you default or pay late. Be very careful. Many people have way too much credit card debt and it is very difficult to pay down the debt when you have it.
Another quick note, be sure that you understand all of the payment terms and the statements when you get a new card. Know how the payments work and how they are applied. Often times this can be a very confusing process. For additional information, review the article 121: How Credit Card Payments Work on our Web site www.nurturingyoursuccess.com.
Leveraging
To a lender, the most attractive borrower is someone with assets under the lender’s control. If you have proven financial responsibility, you are even more attractive. With these two advantages, you can often get a loan more quickly and at better terms. This process is known as leveraging the power of your assets.
Leveraging is a smart move if you can continue to pay down your credit balances. There are many ways to leverage your money; some of these include home equity loans or lines of credit on the untapped equity that has grown in your home, margin accounts on your securities held in investment portfolios, and cash value that grows inside certain types of life insurance. Remember to use prudent judgment when leveraging your accounts. Many people cannot sleep at night doing this; the risk to them is just too great. If you are someone who worries, then this many not be the best investment strategy for you.
Bankruptcy and debt
There are times when people cannot get out of debt. Situations beyond your control can arise and overwhelm you. Unforeseen illness, an accident, loss of life, loss of business or unemployment can change your financial picture in a heartbeat. The best way to strategically plan for these events is to have enough assets put aside that you could continue living your existing lifestyle for a few months until the events at hand shake out and you can make some prudent decisions without the stress of the event. A money market account with 3-6 months of savings is best. Now I know this is not easy to do, so start small and contribute often and you can be there in no time. Remember, not planning is the worst thing to do. Some of the worst financial decisions that can be made are made when people are sick or under emotional duress.
Bankruptcy is a last ditch effort that should not be taken lightly. Many people think that it is the easy way out. This one event will affect your financial picture forever. It makes every aspect of life from a financial perspective seemingly impossible. Are there still people that I feel should go this route? Yes, but only under extreme circumstances when all other attempts to control or work through existing debt have not worked.
The “Basics of Credit” series was designed to give you the basic understanding of credit and how it works. In understanding the process you can use credit in your favor and not have it work against you.
Cindy Diccianni is a Registered Nurse, Certified Senior Advisor (CSA), Certified Long Term Consultant (CLTC), Registered Investment Advisor and Registered Representative with Leigh Baldwin & Company member NASD and SIPC. She is affiliated with Ortner, O’Brien & Ortner Advisory Group, Inc. and co-founder of Nurturing Your Success, Inc. Her passion is assisting clients in creating financial freedom. You may visit Ms. Diccianni atwww.nurturingyoursuccess.com , write to her at Cindy@nurturingyoursuccess.com or call her directly at (610) 251-9393.