Credit Repair Kit For Dummies, 4th Edition
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Looking at credit as a renewable resource changes your perspective: You want to better understand how it works so you don’t unknowingly harm it. It also makes you responsible for not overusing or abusing this important resource to the point of endangerment, or even extinction. To be a good steward of your credit, you need to understand how credit coexists with all the other parts of your financial ecosystem and how it fits into the rest of your life.

Recognize your credit environment

You’ve heard about ecology or ecosystems at one time or another. What is an ecosystem, really? It’s a unit consisting of a number of factors that function together in an environment. Each participant in an ecosystem depends on the others to survive. Together, they sustain one another in a routine pattern of give and take. The balance can be delicate and easily upset. Major disruptions to the ecosystem can be disastrous to all the participants and can take years to undo. For example, in nature, if too many fish were born, they would use more than their share of water and plants, affecting the delicate balance.

Similarly, your credit ecosystem has a number of parts — lines of credit, emergency savings (to fund unexpected expenses without relying solely on credit), mortgages, credit cards, car loans, a payment history, and so on — that function and interact together. If one part is out of control, it impacts the others. A late payment on a bill can cause a ripple effect throughout your credit ecosystem, as sure as a forest fire damages more than trees.

Each factor in your credit ecosystem has an effect on the rest of your life, such as your job, insurance rates, borrowing capabilities, and housing options. Central to the credit ecosystem concept is the idea that your credit, savings, and spending are continually engaged in an interrelated set of relationships with other financial elements that need to be kept in balance to be healthy.

When you take a walk through any environment, you like to know what to look for. If you’re at the beach, you look for footprints in the sand that tell you whether seagulls or terns have been there recently. The presence of horseshoe crabs, clamshells, or broken lobster pots tells you other things about the tide, currents, or passing storms.

The same applies in the world of credit. Does your financial beach have excess income? Is your credit score rising or falling, like a barometer indicating a brewing storm? Does your credit report show healthy activity or signs of stress? The signs are there for you to read if you know where to look and what they mean. In the sections that follow, we help you predict tomorrow’s financial weather and your long-range forecast.

Take a closer look at the parts that make up your credit ecosystem

The major components of your credit ecosystem include your net income, your debts, the types of credit you have available, your payment history, and any major financial missteps (toxic spills) that you’ve made over the last seven to ten years. You may think that some of these items, like your income, aren’t strictly credit related. And you’re right in a narrow sense, but as in any ecosystem, all the parts influence one another and their environment, both positively and negatively.

On the left, the figure shows the interdependencies of a typical financial ecosystem. Beginning with income, this figure visually depicts the relationships among the financial factors that make up your ecosystem. The right side of the figure details the credit portion of your ecosystem. If any part of the system is out of whack, the others are compromised, beginning with offers of credit and building to credit scores.

financial environment Your financial environment is made up of interdependent parts.

Counting your income

Income is always our favorite topic, so we want you to start there. Every biosystem needs nourishment in order to support its inhabitants. Krill are a type of small shrimp that form the basis of a food chain. The krill found at the South Pole nourish migrating fish, birds, and mammals. No krill? No chain of life as we know it.

Your credit ecosystem’s nourishment is income. Because you have income, you can support spending, debt, and credit. Knowing how much income you have tells you what you have to work with and what you can support. If you don’t know what your spendable income is, you can only guess and hope that you don’t harm your environment by overspending or overtaxing your resources. Surprisingly, many people don’t have a clear picture of how much income they have available or whether they’re losing income through leaks in their paychecks.

But what can you do if your income suddenly disappears or is dramatically reduced? Realize that there is no if. Only a when. Sometime during your adult life, this will happen to you. It may be a layoff, a new career that doesn’t work out, a divorce, a pandemic, or a natural disaster. The only answer is to plan for it with savings (cover at least six months to a year of expenses), a spending plan so you’ll know what your essential expenses are and which ones can be reduced, and a solid credit report and credit score.

Balancing your expenses

If income is your fertile resource, then your expenses represent what you take out of your environment. If you’re a farmer, you need to balance the types of crops you grow or the types of animals you graze on your fertile land; too much of either and you won’t be successful. If you’re a fisherman, knowing how many fish you can catch and what kinds you need to leave behind for balance is important for a sustainable ecosystem.

Knowing what you’re spending and how fast you’re depleting your income enables you to manage your income resources so that they’re healthy and productive for a lifetime.

Managing your resources

How can you be sure that you’re managing your resources for maximum yield? It’s easy. You use a plan that accounts for all your income and all your expenses. We call it a spending plan. Making and sticking to a spending plan — sometimes called a budget — assures that you don’t overextend your income resources. Doing so also enables you to be in charge of the resources you use and how fast you use them so that you stay in control of your environment. Just like knowing how many fish a pond can support, you want to know how many expenses you can afford before you commit to them. Failure to plan may result in an ecosystem collapse!

Introducing credit

Using credit in your environment can be a powerful way to increase yields in the present. Credit can be a great thing as long as you don’t overstress your environment to the point of doing long-term damage. A farmer may add fertilizer to the soil and growth hormones to cattle feed. Doing so can enhance growth and yield, but too much of either can damage resources and cause a failure down the road. Knowing the right time to use credit and the right amount to borrow to improve, rather than harm, your credit environment is your goal.

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