Is Keeping Up With The Joneses Affecting Your Credit Score?

By: Denise Keiser AFC®, Counseling Programs Manager

A couple looks at their house from their driveway

Philosophers and great thinkers alike have contemplated money and debt for centuries. Take, for example, Will Rogers’ famous saying: “Too many people spend money they haven’t earned, to buy things they don’t want, to impress people that they don’t like.”

In the spirit of garnering helpful advice from one of the wittiest performers in history, let’s review how money and debt shape today’s credit scores. While Mr. Rogers’ statement doesn’t apply to credit scoring itself, spending money not yet earned can be related to borrowing on credit and possibly overspending. Moreover, the behavioral aspect of living beyond one’s means to keep up with the Joneses can lead to high debt loads and later credit problems that prevent people from achieving financial wellness.

Your Credit Score

First, let’s highlight the oxymoron that to have a good credit score, one must use credit but be disciplined enough to avoid getting over-indebted. Essentially, from any given scoring model, one’s credit score predicts the likelihood of the individual defaulting on future debt obligations based on one’s past financial behavior. Among things like debt accumulation and credit management, credit scoring involves human behavior, making it all the more complex. If you accumulate too much debt or mismanage it to fulfill the desire to, as Roger’s stated, “buy unnecessary things to impress people we don’t like,” then your credit score will likely be impacted negatively.

Financial behaviors include payment history, utilization of available credit, length of credit history, types of credit, and recent credit inquiries. They then become factored into scoring models. The result is a three-digit number we know as the credit score. From there, lenders or creditors who access a borrower’s credit score can reasonably determine whether to lend or not based on the credit risk associated with the score (the higher the score, the lower the risk).

Keeping Up With The Joneses Through Debt

So, how then does keeping up with the Joneses affect credit scores? Your credit scores will increase if you have a good payment history and healthy credit utilization over time. Unfortunately, navigating the use of credit can bring the temptation to “buy now and pay later,” which often leads to overspending and possibly over-indebtedness. That can lead to missed payments or more debt accumulation to make up for an unbalanced budget, further harming one’s credit scores. Worse yet, when debt loads become unmanageable, a greater impact can occur on credit scores when unpaid debts fall into collections, charge-off, repossession, foreclosure, or even bankruptcy.

Debt accumulation can be a downward spiral that leaves borrowers with no hope of getting back on track to a healthy debt and credit lifestyle. There is some good news about credit scoring models, though. Today, a credit score captures a “snapshot” of one’s current credit picture, taking into account the most recent 12-24 months of history. By taking action and addressing high debt loads and correcting negative debts, individuals can get back on track and rebuild a healthy credit score and financial picture.

How BALANCE Can Help

At BALANCE, Financial Counseling provides tools and resources that help clients build good financial habits that lead to healthy credit and debt management, resulting in good financial wellness. On the other hand, Financial Counseling can help those who have experienced financial mishaps or hardships get back on the path to financial health and good credit scores.

Certified Financial Counselors help clients identify starting points and work together to create a clear plan with specific action steps to get back on the path to financial wellness. Financial Counseling at BALANCE offers Debt Management and Credit Report Review Counseling, which helps identify bottom lines and provides options for debt repayment, savings growth, and credit score improvement.

Undoubtedly, the journey to financial wellness for most people comes with obstacles along the way, including financial mishaps—like taking on too much debt to buy things we don’t need to impress people we don’t like. But a financial journey doesn’t have to end at a roadblock, and it shouldn’t be considered a failure. Roadblocks are simply steps within the journey.

To help the families in the communities you service take control of their personal finances, manage their debt and achieve their goals, contact BALANCE at 888-456-2227.

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