Overall, we tend to worry a lot about what other think of us – and there’s no exception when it comes to finances. We often hear from people in serious financial crisis who are more concerned with what the bank thinks about them (via a credit score) than what difficulties and risks their financial problems are posing to their mental health, family-life and even jobs. Here’s why you shouldn’t let your credit score be a measure of how your finances are doing:
Easy come, easy go: Your credit score is calculated using information contained in your credit report. Essentially a credit score is a moment in time and can change depending on your actions. You’ll gain points for ‘favourable’ actions, and lose points for actions demonstrating difficulties, such as maxed-out credit. Lenders have their own unique policies and rules that will determine how your credit score affects your credit application.
It’s important to remember that your score is NOT permanent and can change drastically in as little as two years!
Income and assets affect borrowing power: Gauging your financial health by your credit score alone is a poor measure at best. Having a “perfect” credit score doesn’t automatically mean continued access to new credit. If your credit score is at an ideal level for borrowers, but your income or family situation has varied (ie. pay cut, divorce) then you may not be extended further credit on reasonable terms when you most need it.
Postponing seeking professional debt assistance because of the fear that it will damage your credit rating is common, but ask yourself: “Could I actually borrow enough to consolidate all my debts if I needed to?” For many, the answer is no – meaning that in the grand scheme of things, that credit score isn’t actually doing much (if anything) for you.
Credit Score VS. Budget: Making regular minimum monthly payments on debts will help to keep your overall credit score to stay high – but that doesn’t really reflect your ability to pay the debt off and become debt-free.
Consider the following scenarios: Person A has what they would consider an ideal credit score, and it’s taken them a long time to achieve that, unfortunately due to some circumstantial changes they’re unable to manage their debt effectively and pay it down in a reasonable amount of time. Their credit score probably doesn’t provide much comfort. Conversely, immediately following a bankruptcy, Person B’s credit score will be poor – but now they’re debt-free and can start to rebuild because of the “reset” the bankruptcy has provided.
The main thing your credit score can’t tell you, is how you’re actually doing financially on a day-to-day basis. If you can’t see being debt-free in the next two years, your budget won’t allow for you to make more than minimum payments on your debts, or you’re consistently relying on credit to meet your living costs (or even borrowing from one account to pay the other) – those are clear indicators that it’s time to seek a professional plan to deal with your debt.