Credit Goals

The constraints of credit
Having debt is costly and limits your financial freedom. Setting a goal to reduce your debt may be a necessary precursor to other goals such as purchasing a home or being financially stable and secure. Having debt and owing monthly payments require you to work more hours and allow you less freedom. Being obligated to make a monthly payment is risky—what if you lose your job, get sick, have another child? Decisions about future spending can be changed immediately, whereas outstanding debt needs to be paid back regardless of changes in your income and life circumstances.

Credit is expensive
Credit costs you money! Say you purchase a $500 sofa on your credit card and pay $20 per month on the card. If the interest rate on your credit card is 15%, it will take you 2-1/2 years to pay for the sofa, and you will have paid an extra $100 in interest. Would you have paid $600 for the sofa in the store? You end up paying more than the person who saved money for the same sofa. Everything in life costs you more when you charge instead of save. Look at it this way—you can get more stuff if you buy it with cash rather than with credit.

Why clean up your credit?
Credit is less expensive when you have a good credit history. If a lender knows that your word is good when you borrow money, that lender will give you a better rate. If the likelihood is higher that they will lose money by lending to you, they will make up for it by charging you a higher interest rate. Therefore, everything you pay for with a loan costs you more when your credit history is poor.

You have a better chance of being allowed to put your money in areas that will make you or save you money. Buying assets like a business or a house often require that you borrow someone else's money. If your credit is in bad enough shape, no financial institutions will loan you the money for that asset. Therefore, you have a harder time building your personal wealth if your credit history is poor.

You communicate through your credit history how trustworthy you are. Your credit report is a type of communication with the world—it tells a story about you. You want your credit history to tell people that you are dependable, that your word is good, and that people should be able to trust you. If you have had circumstances in your life that are beyond your control which lead to credit problems, there is a way to explain on your credit report so people have the real story.

   [ Next ] Set Goals!