Personal Wealth Management - maintaining a healthy credit record

The importance of personal wealth management has never been so pronounced than in the current economic environment disrupted by the coronavirus. The credit score is one of the most important measures of financial wellbeing. Maintaining a good credit score is beneficial if planning to apply for a loan to make a major purchase, such as a new car or home. The credit score is used by lenders to determine the how responsibly individuals use credit. The better the score, the increased probability of securing new loans or lines of credit. A higher credit score can influence the interest rates offered by Financial Institutions.

Access to finance is a major challenge, especially in emerging and developing economies. A key factor behind the persistence of this problem is the information asymmetry between lenders and borrowers that encourages adverse selection and moral hazard. To address this information asymmetry, credit registries and bureaus have been established around the world to serve as information brokers. The credit score is not an endorsement or criticism of personal behaviour. Financial Institutions and other credit providers use credit score to measure their risk before borrowing to customers.

Tips to maintain a healthy credit record

Consistent Account payment – all outstanding payments should be paid in full. The credit report shows which accounts have not been serviced and not being serviced consistently.

Settle all negative listing – review all negative information such as judgements, administration orders issued by a court and take active steps to pay all outstanding debts in full so the information can be removed.

Lengthy of credit – maintain a healthy mix of credit (e.g. store cards, credit cards, home loan) in order to establish a strong credit history. Financial Institutions are interested in knowing how long each credit facility has been open.

Credit utilization ratio – is an important number in credit score calculations. It is calculated by adding all your credit card balances at any given time and dividing that amount by your total credit limit. The credit utilization ratio tells lenders you haven’t maxed out your credit cards and likely know how to manage credit well.

A good credit score typically means lower interest rates, being proactive and consistent with credit payments, managing your spending habits, and paying bills on time are some simple and valuable steps to maintaining a healthy credit record.

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