Many Americans are now dealing with greater financial success than they've seen in the last few years at least thanks to the recovering economy, and may now be looking at ways they can invest that money. However, many may still need to take some basic steps toward credit repair before they do so, so that they know their finances are as healthy as they should be going forward.
Before consumers invest money in anything, they should first take a routine accounting of all aspects of their finances and try to increase the amount of personal wealth they have through more traditional means: such as by limiting spending, increasing savings, and taking reasonable steps to reduce debt. They should also, however, take the time to make sure their credit is as good as it should be, as well. This will help them to not only get the most out of their money, but have more of it in the long run, which will in turn allow them to put more toward their investments down the road.
Why having a better credit score helps
When trying to build wealth, there are two reasons a good credit score is vital to achieving the financial goals consumers should have before they start investing. The first is that with a good credit score typically comes far fewer debt-related obligations with which they will have to deal every month. This is because 30 percent of a person's score is made up of simply how much money they owe to lenders as a percentage of their total credit limits on those accounts. For instance, suppose a borrower has three credit cards with $12,000 total in maximums, and the borrower owes $6,000 across all those accounts. That means their "credit utilization ratio," which is what lenders call this measure, is 50 percent. However, it's generally accepted that the best way to max out this portion of one's score is to owe 30 percent of limits or less.
As such, to get to that level they will need to pay down their debts significantly. And while that task won't be easy, and will take a larger up-front effort to reduce those balances more quickly — likely through considerably more sizable monthly payments — it will certainly help to both improve one's credit score in the short term and lead to less debt being added through interest charges in the long term. New laws make it so that lenders must apply any amount paid above the minimum must go toward reducing the balance's principal, rather than interest charges. That, in turn, cuts debts more quickly allows borrowers to free up more money for investment down the road.
Second, avoiding late payments will be extremely crucial to building wealth and maintaining healthy credit ratings down the road for a number of reasons. The first and most obvious is that it is the single largest consideration that goes into deciding one's credit score, accounting for 35 percent of that rating. Missing just one payment deadline can do massive damage, undoing months or even years of hard work to straighten out a rating, and should therefore be avoided at all costs.
Moreover, most late payments come with penalties that can also cost borrowers significantly. For instance, those who miss deadlines might be hit with penalty fees for decent-sized amounts of money that, while not necessarily burdensome by themselves, can add up quickly if missed payments become a habit. Further, interest rates for a portion of one's debt might increase significantly as a result of a late payment, making debt add up more quickly if it's not addressed as expediently as possible.
What this allows for
In addition to being a great way to free up money in their everyday lives, borrowers who take the time to repair credit will also benefit by giving them access to far better terms on the credit they seek in the future. With lower rates and fewer fees, they will likely be able to better afford credit overall and in turn make more reasonable financial decisions as they relate to investments that might be made in the future.
However, one important aspect of credit repair that often goes overlooked but can likewise be extremely helpful in putting borrowers in a better financial state is checking their credit reports with regularity. This will allow them to determine whether there are any unfair markings listed in their name, which may have a profound negative impact on their ratings overall. If any such entries are discovered, then working with a credit repair company may be helpful in allowing them to remediate the issues as soon as possible, and get their credit back to where it deserves to be.