April 19 2018
Written by Ben Nash, financial adviser and the founder of Pivot Wealth, a money management company that helps young professionals make smart money choices.
It’s a common goal for us to want to get healthier. You want to eat better, maybe lose some weight, or get in shape. The benefits are significant; you can do more things in life, feel better about yourself, not to mention you generally live longer...
Being fit and healthy is something many people think about. But far fewer people spend time thinking about getting ‘financially fit’. If your finances are out of shape, your options in life are limited. You can’t live the sort of lifestyle you want and get ahead with your money to set up the future you want, leading to frustration and stress. Get your finances sorted and increase your financial fitness and you’ll create the feeling of freedom that comes with having options, and you’ll eliminate money stress.
“If your finances are out of shape, your options in life are limited”
Your credit score is part of the process banks and lenders follow to decide if they will lend to you, as it is an indicator of your credit risk. Whether you want to buy a home, buy a car or consolidate existing debt, you’re probably going to want to borrow at some point. Your credit score is made up of a range of factors, but those that have the biggest impact are your historical money and credit behaviour, like your debt repayment history, and the number of times you’ve applied for credit (e.g. credit cards).
Your score is built over a number of years, so your actions now will impact your credit score for years into the future. The best time to sort out your credit score was five years ago, the second best time is now. If you wait until you want or need to borrow to learn about your credit score, you might get a nasty surprise and find your options are limited. If you take the time to understand your credit score now, you can start the process of making it healthier, meaning you’re more ‘credit fit’ when you want to borrow.
Like getting physically healthier, it doesn’t just magically happen overnight. There are some steps you need to take to make it happen. Follow the four step plan below to improve your credit score and show banks and lenders you’re one of the good guys.
Step 1 - Admit you (may) be out of shape
Today the way most people manage money is more complex than ever before. You’ve got bills, recurring subscription payments, multiple credit cards, bank accounts, and loans. You’re also more mobile than ever. When you’re young in particular, you move around a lot. You change houses, cities, and states. All these moving parts can mean you forget about things. Most of the time this isn’t a problem, but forgetting about a financial commitment like a bill or credit card, even for a short time, can have a negative impact on your credit score for years.
The first step to getting credit fit is to find out what shape your credit score is in. Ask yourself, “What’s the worst thing that can happen by finding out your credit score?” Finding out your credit score is free and doesn’t reduce your score in any way, so it’s a great step in your financial education. If your credit score is looking ok, that’s great; now you can focus on maintaining it or making it even better to create more options. But if there’s an issue or problem you need to solve, knowing now and understanding what makes up your credit score will help you to start taking steps to make it better.
If you need to improve your credit score it will probably take some time. If you wait until you’re ready to buy to look into your credit, it might be too late to take the action needed to borrow in the timeframe you want.
Step 2 - Stop eating junk food
Gen Y would benefit the most from getting financially fit. We have accounts everywhere, normally multiple credit cards (whether in use or not), and often forget to pay our bills on time. Based on recent data, 72% of Gen Y Aussies report making financial mistakes like late payments and missing due dates on bills.
Just like your physical health, you know when you’re doing things that are making you less healthy. The same holds true with your financial health. While you might not know the full extent of a problem, you probably know you’re being a bit slack. If you’re relying on credit cards to fund your spending, you need to break the habit. If you’re lazy with your bills and debt payments, sort it out. Don’t bury your head in the sand or you can create problems that take years to recover from. Check out this article to learn more about how to reduce unhealthy credit score behaviours and improve your credit health.
Step 3 - Increase your fitness
Recent changes to the laws around credit reporting mean more of your information will soon be shared and used to calculate your credit score. In the past, banks and service providers were only required to report negative information like missed bill payments, defaults on loans and bankruptcy. But with these recent changes to the law, banks and other agencies will soon also report positive credit behaviour, such as on-time repayments and good banking behaviour.
The banks aren’t openly sharing information today, but the government is pushing to mandate that banks share information on all customers to allow comprehensive credit reporting. When this happens, loan providers will likely use the data to help establish the interest rates you pay on your debt. This is already happening with providers like Society One.
My guess is that in the future, smart companies will seek out borrowers with solid financial behaviours and probably favour lending to them because the risk is lower. If you want to put yourself in the best position possible, take action now to get solid around your savings and spending.
Step 4 - Consider if you need a ‘personal trainer’
Like getting more physically fit, using a personal trainer can help push you forward. A money coach or adviser can help give you the tools, motivation, and accountability to increase your financial fitness.
Having someone in your corner with access to the tools and strategies can help you get what you want faster and easier. A money coach can also give you a gentle (or not so gentle) push when it’s needed, and help you get back on track if you get side-tracked or distracted, or better yet, utilize the free services GetCreditScore offer (who are also on your side) to help you monitor your credit score regularly and notify you of new deals via the product section to help you save.
The more unfit you are, the harder it is to get yourself into shape. This holds true for physical fitness and your financial health. To increase your financial fitness, start taking small steps now to make it happen. There is no silver bullet or quick fix; you just need to put in the work. Now. If you don’t take action, you’ll just be kicking the can down the road and making it more difficult for yourself in the future.
It all starts with knowing where you’re at now. Use a service like GetCreditScore.com.au to assess how fit you are and work out what behaviours you need to stop (or start) to move closer to your perfect summer (credit) body. This will make you more attractive to lenders and increase your financial confidence. By sorting your money out you’ll also feel happier and more excited about the future in general.
Take control. Make it happen. I promise you’ll thank me later.
Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstance before acting on it, and where appropriate, seek professional advice from a finance professional such as an adviser.
 Source: GetCreditScore.com.au Financial Literacy Consumer Research, 2017