If you read about investing on the internet, you probably don’t come across much information about personal credit. These are often considered two different concepts for two different kinds of individuals. However, personal credit history has important ramifications for the effectiveness of your investment strategies. Click through for a guide on how to repair credit, or just read on.
Bad credit hurts your returns and your overall passive income potential. Here are a couple of ways.
- Let’s say you have an income property that you want to buy. For our example, we’ll say it’s a single family home that will yield $1500 in monthly income. You have enough money for the down payment, and your offer gets accepted. You’re home free, right? Well, it depends on your credit score. If you have a mediocre credit score, this will have a profound impact on how much you’ll pay for your house. If your credit score was 800, say, you might be able to get 5% interest on your loan. But if your credit score is 620, you might pay as much as 7%. This will make your new investment 2% more expensive each month, and overall. As any investor knows, 2% is a lot!
- Another way that bad credit can impede your investment goals is by increasing your debt. The lower your credit score, the more expensive it will be for you to borrow money. This will be apparent in situations as simple as charging items to your credit card. If you have to pay 25.9% on a credit card, this debt will accumulate very quickly! Every dollar you spend to pay it down is a dollar you can’t invest. The faster your debt accumulates, the more money you have to allocate to debt payoff, and the slower your investment portfolio will grow.
- Bad credit hurts income opportunities. Let’s say you want to get a better paying job. You have all the qualifications necessary to advance, but you are competing against three other equally qualified people in your department. Your employer can and will look at your credit score as a way to decide who is actually the most qualified and trustworthy applicant. You may not ever hear the real reason why you didn’t get that job, but at the bottom of it, your credit score is to blame.
- Bad credit impedes cash flow. Because people with bad credit have to pay more for borrowed money, their budgets are stretched thinner than those of the people with good credit. This allows less money to go to investments each month, even if some of these payments aren’t significant debt.
In the end, the people who become the best investors find a way to take care of their bad credit. Once your credit is strong, you’ll find it much easier to save and invest, without the constant struggle for funds and the stress of bearing up under debt. Keep up these new habits for life, and your investments will constantly be improving and creating further wealth and security.