How does your credit rating affect your ability to build wealth for the future? Do you know what your own credit rating actually is?
A lot of people (including financial advisors!) underestimate just how important your credit rating is. A solid credit rating is the cornerstone of any successful wealth strategy, and is one of the first things we focus on with clients here at McCarthy Group.
We think of your credit rating like any other asset. It can be a powerful tool and we want to protect it and make it work for you. In this article I’ll show you just how important your credit rating is, and how you can make sure it is an asset to your own wealth creation strategies.
What is a Credit Rating?
A credit rating is a measure of your credit worthiness. It gives the companies you deal with a rule-of-thumb as to how much of a risk you are. If they lend you money, are you going to pay it back? If they sell you an ongoing service, are you going to break your contract?
There are different ways of calculating credit ratings. Banks are even talking about ‘credit scores’ these days. However, they all build off the same thing – your credit history.
Your credit history is like a school report card from all your past credit events. It’s not just bank loans. Every time you enter into a contract you enter a credit event – utility bills, phone contracts, furniture bought on finance. It all goes in there.
If you’ve always paid your bills on time and never fallen behind on your loans, then you will have a superior credit rating. However, even if you’ve only stumbled once or twice with meeting your obligations, this can have serious consequences for your credit rating.
Why is my credit rating important?
The key to any successful wealth creation strategy is the intelligent use of leverage – putting other people’s money to work. If a business had to fund all of it’s growth and investment through current earnings, it would grow very, very slowly. The same applies to us.
Your ability to use leverage to your advantage is fundamentally based on your credit rating, in two key ways:
- The knock-back: A black-spot in your credit history can be enough for a bank to reject your application for a loan. Following the GFC, banks around the world have been tightening their lending standards, making it harder to get a loan everywhere. To make matters worse, if a bank knocks back your application, your enquiry is recorded on your file. If there are a growing number of rejected enquiries, this can make banks wary, and make it much harder for you to secure a loan.
- The premium: If there’s something in your credit rating that makes you appear a little more risky, a bank may still approve your loan, but decide to charge a premium to compensate them for the extra risk they’re taking on. This means getting charged a higher interest rate. In practice, and in the competitive financial sector, it means not being able to secure the discount you might have wanted off the advertised rate.
All this is why at McCarthy Group we make sure our client’s credit ratings are in the best shape they can be before we start negotiating with banks on their behalf.
How can I protect my credit rating?
It takes time to fix a bad credit rating. You need to out-weigh the negative credit events with positive ones. However, prevention is by far the best cure. Make sure you pay your bills on time, and think carefully about the credit relationships you are entering into. Consider saving up for something before reaching for the plastic.
It is also a good idea to check your credit rating regularly, to make sure there are no mistakes. The government website lists the two main credit reporting agencies. They are:
You might be surprised at how often mistakes can creep into our credit records.
Making Your Credit Rating Work
I don’t think most people understand that even little things, like being a little late with your phone bill a little too often, can leave a black mark on your credit rating. And most people definitely don’t understand just how important their credit rating is for securing loans at the best possible rates, and leveraging that finance to their advantage.
At McCarthy Group, we make the credit rating one of our first priorities when we’re helping customers build their investment strategies.
Checking your credit rating for errors can seem like a little thing, but it can make a big difference to your wealth creation strategy in the long run.