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February 5, 2021 6 min read
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At some point, nearly everyone carries multiple types of financial debt obligation, whether it be a credit card, a home mortgage or a business loan. Establishing a trust relationship between a lender and a potential borrower follows a very similar progression to human interpersonal relationships, but with the benefit of some very well-established patterns of behavior and factors that influence the outcome.
Knowing that almost everyone will need some type of credit extended to them in the future, it makes sense to start learning the factors that could negatively impact your attractiveness to a lender and implement habits that avoid limitations of access to credit when it’s required. Here are some of the top behaviors I recommend to getting your “lending dating profile” into top shape.
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1. Start treating ongoing credit management seriously
While the need for credit certainly doesn’t rank up there with the basic needs of food, shelter, and security in models like Maslow’s hierarchy, it certainly informs a critical aspect of financial security in the modern age and should be shown some priority. I counsel my clients to start modestly in these efforts, taking a “crawl, walk, run” approach to active, ongoing management of their personal credit profile.
The first step in this endeavor is nothing more than basic awareness — reserving some time periodically for intentional focus on your credit utilization and opportunities for improvement. This can evolve into a more active strategy by taking prioritized, tangible improvement steps in your credit with regular measurement and reprioritization based on outcomes. Understand, as with managing most things, driving change requires measurement — finding a reputable credit score reporting service like Credit Karma that you can use to track progress should be one of the first tools incorporated into your strategy.
2. Manage your personal information with a defensive bias
Attempts to compromise your personal details is usually done with a financial goal in mind. Thieves want to use your identity to obtain credit. Once it happens, it can be an expensive endeavor to undo. It’s much cheaper — and simpler — to start with a strong defensive approach. I’ve worked with multiple clients who have suffered from not being proactive. The financial and credit reputation impacts can be long-lasting. As a result of the growth in identity theft, many financial and credit reporting agencies have continually improved their response and repair options, but the burden of proof and completion of reconciliation activities falls mostly on the impacted individual. The required steps to restore one’s financial reputation and borrowing power is much more difficult — and costly than spending the money on preventative options.
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3. Look to increase your borrowing limits
Take active steps to request increases to your credit limits with your current lenders. Assuming you have a consistent positive history of repayment, many lenders will make modest increases to your current limit without the impact of an inquiry against your record with the credit reporting bureaus, which can have a downward influence on your score. Credit utilization ratios are quite commonly misunderstood when I counsel individuals on credit management — a common misperception being that holding a higher opportunity to borrow is contrary to the goal of debt management. My advice is that it’s critical to remember that borrowing potential is not the same as indebtedness. A higher relative opportunity to borrow against the actual debts owed makes you appear more bankable and will positively influence credit reporting scores.
4. Don’t just make the minimum required payments
By not paying off your full balance monthly, you incur not only additional growth in your overall obligation, but interest charges accumulate, further compounding repayment timing. Getting into a habit of paying down additional principal on the loan amount can not only positively reduce the total repayment schedule but can influence a healthier mindset towards outstanding debt management.
5. Never miss on scheduled payments
On-time and consistent payment of your scheduled debt obligations accounts for greater than a third of your overall score with measures like FICO®, and as such reflects significantly to other potential lenders. I continue to be surprised working with borrowers who don’t fully understand the impact of late payments, commonly assuming that missing one payment may simply add a penalty in the form of additional fees or a potential increase to their borrowing rates. Most lenders report missed payments to the credit bureaus. It usually happens with little delay and minimal notice to the debtor. Should you ever make such as mistake, I advise working with your lender as soon as possible to attempt a correction and avoid the credit hit.
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6. Avoid higher risk borrowing options
While both legislative reactions to past financial events and a general reduction in risk tolerance by lenders have limited the overall inventory for higher-risk/lower collateral lending solutions, they do exist and can be attractive and accessible. Many lenders that offer these options do so with an understanding of the higher commensurate risk and provide their funding support with terms that do not generally favor the borrower long-term. I advise my clients to honestly assess their current state to define a loan need and repayment reality, as assumptions on unproven future income should be understood as a gamble. Higher risk lending solutions also reflect negatively for other prospective lenders, as these parallel obligations assume a potential adverse cross-impact. If credit is required to advance the creation of a new enterprise or the development of an innovation, numerous alternate solutions exist including grants and forgivable loans that may be more beneficial and reflect more favorably on you as a lending prospect. These strategies increased my credit score from 450 to 819.