Credit Matters: Keys To Building Healthy Financial Relationships

By Alanna McCargo

Credit is a critical and fundamental part of our nation’s financial economy and history. It is the trust that allows one party to provide resources to another party without immediate reimbursement, and allows repayment or return of those resources at a later date. The key words here, especially in regard to consumer credit, are “trust” and “repayment.” Your ability to pay back what you borrowed – usually with interest – and to do so on time, creates trust and earns you a good credit rating in return.

Today, many people are maxed out on their credit, and many others are failing to pay back what they borrowed. Finances are shattered, relationships (between consumers and creditors) are fragile or broken, and faith is being lost in the credit system. This is a serious problem for the overall economy, because if these relationships remain strained, consumers cannot buy as much as they once did, and creditors will not lend money as readily. In addition, companies will continue to put off hiring new employees and will feel forced to fire more workers amid their uncertainty about profits and the economic slow down. It’s a vicious cycle, isn’t it? Credit plays a big part in consumer spending and is critical to the overall financial system.

Here are some facts. The rate of consumer credit growth was 7.6% ($15.5 billion) in June 2011 according to the Federal Reserve’s August 5 statistical release. There was no significant growth in salaries or wages, and job growth is at a complete standstill (last week’s jobs report showed zero new jobs created). Consumers are increasing their credit lines faster than the overall economy is growing, which could be an indication of many bad things – the worst of which is borrowing money and tapping all of their available credit to pay the basic bills.

Over-extension on credit is costly and can quickly spiral out of control. In addition, the expanded rates of credit use could be an indicator that consumers have tapped out savings and are close to being broke.

A Matter of Trust

In this delicate credit environment and with the volatility of the overall economy and job market, it’s important to remain focused on managing credit and staying in a trusted position with creditors. Bottom line – pay the bills on time, even if it’s only the minimum payment. When times get tough, especially if you have been out of work, it may seem like you are without options. Nonetheless, bad things can happen if you mismanage your credit during this post-recession.

Creditors get very tight about lending any money at all when they are not being repaid. This means you lose buying power or the cost to borrow goes up significantly. Additionally, your credit rating takes a big hit and you lose credibility and opportunity when it comes to future buying, employment, or starting a business. Essentially, your potential to build wealth is impacted. Credit ratings are a reflection of who you are and what you are all about. Yes, people go through tough times, but a new employer will not know that or forgive it when they run your credit and see a big mess. Even people with good-paying jobs may lose them if their credit deteriorates. For example, many military jobs or those within the government require security clearances. To maintain your clearance (and the job) your credit needs to remain in good standing. The time has come to start looking at credit as a serious relationship, ensuring that trust is maintained. Once you lose it, it has a ripple effect throughout your life, putting your overall financial health and future in jeopardy.

Tips For a Healthy Credit Relationship

  • Stay true to your commitment – Pay your bills on time, even if it’s just the minimum payment due, make a payment and show good will. You made a commitment when you borrowed the money and you need to honor it.
  • Communication is key – Contact your creditor if you cannot pay the full amount you owe. Often, creditors can work with you on a repayment plan or you might even be eligible for forbearance (relief from full payment of a debt) for a period of time, particularly if you are unemployed. You have to keep communication flowing if you want to keep good faith.
  • Your job is your credit – Many employers require credit and background checks to fill positions at all levels. Your credit is an indication of who you are and is used to define your worthiness. If you are not managing your credit, you are going to be overlooked for jobs. With the African American unemployment rate at 16.7% (almost two times that of whites), it is critical to remove potential roadblocks when competing for a job. Your credit report should be as impressive as your resume.
  • The later you are, the worse off you will be – Your credit score can drop significantly if there are long periods of delinquency reported. If you are behind 30 days or more on a payment, get in touch with your creditors and create a plan to catch up. The longer you are delinquent, the more severe the hit to your credit score.
  • Know where you stand – You should be regularly reviewing your credit report and know where it stands. Everyone is entitled to a free copy of their credit report from all of the reporting agencies once per year. Annually review your credit report and score to ensure it is accurate and you know where you stand. Finding out what your credit picture looks like because you’ve been denied a job or were unable to obtain financing for a car or house is not the right time to become informed. You should always be in control and aware.
  • Build a safety net on the side – Do not rely on credit alone for buying power. Saving is critical, and nothing is better than buying with your own cash with no interest. Although that isn’t always an option, it’s imperative that you keep perspective and balance your use of credit and your use of cash. If you seem to be tapping into credit more often because cash is low, you probably need to reconsider how you are spending and refocus on your savings plan. Remember, debt does not create wealth.

On Thursday, listen closely as President Obama and others lay out economic plans to try and move our country forward. You will likely hear themes around the need for job creation, housing stimulus, and increased consumer spending to get the economy moving. The topic of credit may or may not be specifically mentioned, but the success of any proposal will hinge on the need for increased buying, spending and building by the American people. It will highlight the need to restore trust and credibility into a very broken economic system. And the proposals should clearly highlight why credit matters and how healthy financial relationships are central to our progress.

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