The Wise and the Wary
Who can you trust? Deb hears this question over and over again in her professional practice as an elder law attorney and a fee-only, holistic financial planner. Let Deb teach you how to protect yourself and your assets from those who might not have your best interests at heart. [Editor's note: Deb no longer contributes to Silver Planet, but we have made her archived blog entries available as a service to our readers.]
A Responsible Use of Credit
Are you getting the lowest rates available?
My next several blogs will cover the financially responsible use of credit. The year 2009 has clearly been one of financial uncertainty, both in the stock market and in the credit market. The days of abundant and cheap credit are gone. The easy underwriting standards of 2007 seem like distant history. More than $1 trillion of credit lines extended by banks have been eliminated in the last few months.
Why should you care? You may reason that you’ve already paid off your mortgage, you faithfully pay off your credit cards every month, and you always pay cash for new cars. You may feel that your debt-free life deserves hearty congratulations, but you won’t hear that from me. Some amount of debt is crucial for financial fitness, as counterintuitive as that may seem. But that’s the topic for January’s articles.
In the meantime, the vast majority of Americans are not debt free, so this blog’s for you. Whether you carry a mortgage, a home equity line of credit, an auto loan, or a monthly credit card balance, the interest rates on these loans directly affect your monthly cash flow and, ultimately, your net worth. Are you sure you’re getting the lowest rates available in the credit market?
Whether you are or not depends on your credit score. Many of my clients equate this number with a sort of “report card grade” for their financial savvy. The higher the score, the higher their grade point average. They take pride in a high number as a sign of some coveted state of financial good health.
This is only partly true. While I encourage clients to improve their scores by following my suggestions, I emphasize that this is only one component of financial health. Their credit score does not address their income, asset level, employment stability, or risk management.
Their credit score is, however, a measure of their past use (or misuse) of credit. From this, creditors will assess the statistical probability of them paying off their debts in the future. The score is simply a guess as to whether you’re a good risk. And the lowest interest rates are only offered to the best risks.
Next week, we’ll cover this score in more depth.
By Deborah Hoskins, JD, CFP
The Wise and the Wary Blog
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A Responsible Use of Credit