More often than not I see clients who tell me they have good credit, yet are still struggling to pay their bills. Having a good credit score is great, but that alone does not necessarily mean you are good with managing your finances or that you’re not in debt.
Let’s say you have a great credit score but you have to rob Peter to pay Paul (and pay on time), or you can only afford to make the minimum payments. In this case, the reality is that you likely have little to no cash flow for day-to-day needs and may not actually be a good credit risk despite your high digits.
Here are the four ways your great credit score isn’t the be-all and end-all of your financial life.
1. Great Credit Scores Aren’t Forever
Just because your credit is great today doesn’t mean it will be tomorrow. Credit scores are based on a number of factors and if you miss a payment or run up a high balance on your cards, your credit score can drop from excellent to fair in no time. If you want a better understanding of how well you’re handling your finances, track your credit score for a couple of months and take a look at your credit report to see the big picture in terms of the number of open accounts, balances and your ability to pay those debts. The more information you have on hand, the more you’ll know about your financial situation. (You can track your credit scores for free every month on Credit.com, to look for changes.)
2. More Credit, More Problems
Chances are, if you have a good credit score, you’re probably overwhelmed with credit card offers. While you probably toss the majority of these letters in the trash, the temptation of getting an even bigger credit limit can be hard to ignore. However, taking on too many credit cards can complicate your finances and make it incredibly easy to get overwhelmed with debt.
3. Great Credit Doesn’t Equal Great Cash Flow
When your credit score is calculated, your income isn’t included in the equation. So while a good credit score might mean you make your payments on time, it wouldn’t be able to tell you if you can afford the essentials. Make sure you are budgeting and spending responsibly. It is most important to focus on your household expenses and that they are being accounted for.
To keep your credit score up, be aware of what factors contribute to your credit score – the biggest ones include paying on time every time and using a low percentage of your credit limit. That way you can make sure you have all your financial bases covered and have cash in your pocket and the bank, and can pay all of your bills easily with the income you have.
4. A Great Credit Score Means You Still Need a Budget
If you don’t properly manage your expenses, there will come a day where you’ll find yourself unable to pay the bills. Minimum payments might be enough to keep your good credit score afloat for a little while, but if you keep spending on the cards you’ll quickly find yourself deep in debt and with no way out. Always include credit purchases in your budget and make sure you stick to your limits.
It might sound crazy, having good credit is important, but being on solid financial ground is important too – and ideally, your good credit will come from that. Hear me out: From what I’ve seen with my clients, if you are having trouble paying your bills, or even putting food on the table, it’s much better to take a step back and get rid of some debt (whether through negotiation, bankruptcy or debt settlement, for example) rather than worry about your credit score taking a hit. You can rebuild your credit when you’re in a more stable financial position.
More on Credit Reports & Credit Scores:
- How Do I Dispute an Error on My Credit Report?
- What’s a Bad Credit Score?
- How Credit Impacts Your Day-to-Day Life
Image: Wavebreak Media