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Top 3 Reasons Why You Shouldn’t Focus Solely on Your FICOs…
Is it ever possible to have great FICO scores and still find it hard to pay your monthly bills? The thing that most consumers fail to realize is that credit and debt aren’t exactly that same things. Yes, they're both related to one another (perhaps in a symbiotic kind of way). But in reference to personal finances, the two phenomena tend to sway in opposing directions. If debt is bad, then credit must be good, right? Obviously, without the use of credit you don’t end up with debt. Nonetheless, debt alone by itself can become an uncontrollable buzz saw that can wreak havoc onto your personal finances. Still yet, this presents the next logical question: Is having a very high FICO score with a very high debt burden ever a good thing? The answer may surprise you—it depends. Here are the three main reasons why you shouldn’t just focus solely on your FICOs:
Reason#3: Great FICOs Doesn’t Mean Great Cash Flow
While FICO’s scoring criteria may come across as a bit mysterious, but the one thing that isn’t left to conjecture is whether your income plays a factor. In fact, your income isn’t included in the equation at all. What is included in FICO's scoring formula has largely been made well-known: on-time payments, trade line history, and of course a little thing called utilization, which is the ratio of credit used verses the total credit available. Still yet, what many consumers should be vastly aware of doesn’t necessarily appear to be of great importance—and that is the issue of affordability. This concept especially holds true since it’ll be your disposable income that you’ll use to pay your bills in the first place. Nonetheless, here’s what you should do: 1) make sure you cover all your financial bases; and more importantly, 2) make sure you have a small amount of savings in the bank. This way you can afford to pay your bills easily with the income you have.
Reason#2: Great FICOs Doesn’t Mean Great Budget
How important is a budget? Some might say very important. What most consumer fail to realize is that going without a budget can only mean one thing: bad money management. Perhaps what most consumers fail to realize is that improperly managing your expenses can cause your financial house of cards to fall over. There will come a day when you’ll find yourself unable to pay your bills, especially if you’re one of the millions of Americans living paycheck to paycheck. Obviously in order of financial priorities, having high FICOs scores has to be high on the list—especially since FICO scores are used as a financial barometer to judge ones risk of default on most financial product, including mortgages, personal loans, and even insurance rates. Still yet, there must be limits. In this same vein, making the minimum payments might be good enough to keep your FICOs from tumbling, but if you keep spending, spending and spending, you’ll quickly realize just how deep in debt you’re really are. This is why you shouldn’t only keep a well detailed budget, but also why you should always include credit purchases onto your budget.
Alas, if you’re worried about whether or not you’re going to budget right, you should stop your stressing. Currently, there are a number of great online budgeting sites, including budget plus, personal capital and mint.com, the pioneers of online budgeting tools.
Reason#1: Great FICOs Mean More Credit and More Problems
All things being equal, if you’re one of the fortunate Americans with good FICO scores, then chances are you’re one of the many Americans tempted to get bigger credit limits. To say the least, these higher limits, (along with special perks such as, cash back, reward points and zero percent APR) can be quite tempting. Nevertheless, taking on too many credit cards with higher limits can not only complicate your personal finances, but it can make it increasingly hard and burdensome to back get on solid financial footing. Hence, for the millions of consumers having trouble paying their bills (or even putting food on the table), it may be best to focus more on debt than credit: you can always rebuild your credit over time.