In this post I am going to cover a topic which has seldom been spoken about on other personal finance & debt related sites/blogs: The Concept of Credit Positioning. For those of you who are already in a deep debt situation or behind on payments, this strategy will not be of help, but for those looking to stay out of financial trouble this may be one of the most important topics you think about.
The best way for me to explain to you what credit positioning is or what it means is to have you read this quote: “It is better to have access to money, and not need it, than to need access to money, and not have it”.
Let me break it down for you: If you have access to money and do not use it, you are in a position of safety & liquidity. When it comes to most types of credit, we do not pay for money we do not borrow. So having access to money/credit and not needing it is a powerful position to be in.
On the flip side, if you need access to money/credit and do not have it, what are your options? Think of all the things in life that cause negative financial circumstances and needs for money: Foreclosure, Medical Emergency, Job Loss, the list goes on. The point is: When one of these “unexpected” occurrences comes up, if you have access to money you can weather the storm. If you do not have access to money, you end up turning to any option available which can, many times, make the problem worse. In it’s simplest sense, credit positioning is all about BEING PREPARED.
Many of us live life day to day and think..”well all of my bills are paid, my mortgage is paid, so I don’t need to worry about money”. This may be true on the surface, but when you think you don’t need to worry about money, that is actually when you should be financially positioning yourself for the future when you will need it. This concept will not make sense until you understand that no matter how much money you make, where you live, or how big of a family you have, things WILL happen that can cause financial & budget turmoil. So knowing this, the question is how do you position yourself so that when something comes up you can get through it?
There are several schools of thought on this, but it all boils down to 2 options:
A) Keep enough money in a savings account so that in the event of a financial emergency you are able to tap these funds to help you get through
B) Position yourself with enough access to credit so that you are able to do the same
If you can go with option A, you are one of the fortunate ones with enough savings to ride out a period of major financial disability. For more and more families this is not possible, and option B is the next best thing: To be positioned with enough credit to ride out any financial storm which may come their way. I realize for many people this advice does not make sense…You are thinking “Well, Rob, I am trying to get rid of my debt, so why would I want to have more access to credit?”
Credit on its own is not a bad thing; Actually many of the top entrepreneurs in this country got there because of their ability to manage their debt & finances wisely. It is when you start abusing the credit you are given (i.e-buying things without thinking about how you are going to pay them back) that access to credit becomes a problem.
So lets apply this to real life; situations that are going on right now. Lets say that Bob & Jane Smith have a home they have been paying on religiously for the last 2 years; they have never had a late payment. Suddenly, Bob loses his job-Him & his wife did not know the secrets of credit positioning, and they did not have more than 1-2 months of savings set aside for emergencies. Over the next several months Bob tries to find a job, and finally does, but by that time the bank has already began the foreclosure process on their home and their once-perfect credit scores are now devastated. Now Bob & Jane Smith are forced to rent a home for several years, they loose all the home equity they had established, and it will take years for them re-establish their credit, not to mention all of the self-esteem issues that can stem from what happened.
On the other hand, lets say that Bob & Jane Smith read this article about credit positioning and decide to be proactive and think ahead. Instead of just having a few months of savings for emergencies, they open up a $15,000 personal line of credit while their credit is very good and they are not having any financial difficulties. They are not opening this line of credit use to purchase anything, but as a means of financially positioning themselves because they understand it is important to have access to money when they don’t need it, so it will be available when they do.
The same scenario happens and Bob loses his job. Instead of tapping all of their savings and the home going into foreclosure, they use the personal line of credit to supplement their income for several months and keep their mortgage on track while he is looking for another job. At the end of 4 months, Bob finds another job and puts together a plan which will pay down the credit line they had to borrow from over a 6 month period. Their 700+ credit scores are intact, all their bills are paid, they still have their home, and none of the stress or self-doubt that could have come along with a foreclosure.
These two scenarios are almost identical; The only difference is CREDIT POSITIONING! The scenario in which they got positioned for an emergency before they needed the money allowed them to weather the financial storm. So before you take this as a good reason to go up and open a new credit line, realize this only works with financial discipline: If you abuse the credit which you have positioned for the future it loses it’s purpose and will get you in a financial mess, like any other type of debt. My recommendations are as follows:
If you have less than 6 months of “emergency funds” in a savings account open a personal line of credit or credit card that will allow you to make up for the difference. The interest rate or rewards don’t really matter since this credit is only to be used for short-term emergency borrowing and then paid back quickly thereafter.
If you already have 6+ months of savings available, Congratulations! You are ahead of majority of Americans, as you might already know. The truth is, having access to credit and not using does not hurt (and often actually helps your Fico scores over the long-term). Go ahead and get another credit card or credit line that you keep with a $0 balance for short-term emergency borrowing. As long as you do not use it and it does not have an annual fee, it won’t cost you a dime-but it sure can give you a lot of peace of mind!
P.S – You may already have a credit card or line of credit with a $0 balance which you can use for the credit positioning purposes I discussed in this article. If so, just change the way you look at your money & finances and put that card somewhere safe so you don’t get tempted to use it. Perception is reality!
P.P.S – If you are already under a mountain of debt and no matter what you do the credit card and mortgage balances won’t go down, call my office for a FREE, No-Obligation Debt Melt Down analysis so I can help you set up a plan to eliminate your debt, once and for all! The number is 1-888-456-5635.