For many Americans, bad credit is viewed only through the prism of higher interest rates, lower borrowing limits and excess fees on credit cards, automobile loans and home mortgages. Marketers sell the public on the notion that they need not wait for good credit to live their dreams. Rather, they can purchase their dreams today, even with bad credit! Bad credit will never prevent you from “consuming.” However, bad credit can and will prevent you from producing the wealth that you need to achieve financial security.
There are four primary ways to create wealth in America: owning a private business, purchasing investment real estate, saving and investing and obtaining an executive-level compensation package from a large- or mid-size corporation. Since the days of the Founding Fathers, all wealth in America has been created in one of these four ways. Business owners create the bulk of the wealth in America. This is followed by “investors” in real estate and then savers/investors. Bad credit has a significant impact in each of these categories. Here’s how:
Private business ownership.
Most early-stage businesses require financing to get started and to grow. Much of the financing for these privately held businesses comes from lending institutions. These institutions rely on the government loan guarantee from the U.S. Small Business Administration (S.B.A.) and on their own community lending credit standards to determine if they want to extend financing to a company. As most small business loans require the personal guarantee of the business owner, your personal credit rating is the key factor in determining if the loan is going to be extended. On the S.B.A. Web site (www.sba.gov [3]), you will find this quote: “To determine if you qualify for S.B.A.’s financial assistance, you should first understand some basic credit factors that apply to all loan requests. Every application needs positive credit merits to be approved. These are the same credit factors a lender will review and analyze before deciding whether to internally approve your loan application, seek a guaranty from S.B.A. to support their loan to you, or decline your application altogether.” In other words, if you have bad credit, forget about the S.B.A. and banks as a source of capital to start or grow your business!
Commercial (investment) real estate.
While many consider the equity in their homes an “investment” in real estate, purchasing investment real estate is really the wealth driver in the real estate sector. To purchase investment real estate, having the down payment is not enough. You have to have good credit! “In commercial financing, loan programs vary by lender, but in nearly every instance personal credit has a significant impact on the borrower’s ability to obtain the loan,” says David Bourse, loan officer for Brandywine Mortgage Co. in Philadelphia. Thus, if you have bad credit, you simply will not be able to use investment real estate as a wealth-creation vehicle.
Saving and investing.
Creating wealth through saving and investing requires the employment necessary to generate income. Historically, credit has not been a key factor in the employment decision. Today however, more employers are considering personal credit history as a factor in extending employment to a prospective employee. According to the Society of Human Resource Management, in 2004, 35 percent of companies that it surveyed pulled the credit profile of current or potential employees. This is up from 19 percent in 1996. Employers often use credit reports to verify employment history and Social Security numbers, so peeking at your credit history is to be expected. In some instances, particularly for jobs within the federal government, a credit check can have an impact in obtaining or losing a job. According to James Lee, chief marketing officer at ChoicePoint Inc., which specializes in providing background checks for corporations and the government, “The federal government routinely requests credit checks for employees and may deny jobs or promotions when the employee has direct access to cash on the job, or when a security clearance is involved.” Credit is having an increasing impact on employment, which, in turn, impacts your ability to save and invest. With more and more companies interested in seeing the personal credit history of their employees, bad credit can have a negative impact on your ability to create wealth using saving and investing as your primary strategy.
Good credit is key to achieving financial stability. Without it, it is very difficult to take advantage of wealth-creation opportunities in America. We encourage you to clean up your credit rating if you have bad credit and to routinely check your credit rating if you have good credit.
David Hinson is founder of Wealth Management Network in New York
City, 646-375-2388, www.wmnllc.com [4]. E-mail: dhinson@wmnllc.com.
By David Hinson