A Thought on Credit

In this article, I will be touching on protecting your credit and the importance of doing so.

First, what is credit? Credit is the promise to re-pay a lender or borrower mostly with interest. Your credit Score (Transunion, Equifax, and Experian) will show lenders/sellers your credit worthiness when analyzing a potential purchase/deal.

As an investor, your ‘Credit Worthiness’ will define your ability to lend and borrow money, purchase property assets, automobiles/vehicles, and so much more. So, with all of the active forbearances attached to Covid-19, a good bit of those will roll into foreclosure. That means that if you own a property that goes into foreclosure, your credit is going to take a hit that will leave you virtually unable to make future investments without a joint venture partner, or someone with excellent credit.

So, how does one protect themselves from this happening? Step #1, communication with your lender is paramount. If your ability to re-pay a debt has been compromised by a life event (i.e. Covid-19), the first thing you should do is reach out to your lender and work out a forbearance to prevent foreclosure. The lender will then look at the history of re-payment (having a consistent pay history will help immensely) and assess the risk attached and will come back with the terms of forbearance. If you have trouble re-paying without a life event, you are going to have a hard time getting a forbearance. It is very important to remember that with every missed payment, your credit will take a hit much like rolling a snowball from the peak of Mt Everest.

Now, a lot of investors have emergency reserves for the eventuality of a life event, but those reserves are finite. If communicating with your lender/loan holder doesn’t yield good fruit, or you are just unable to re-pay, you can sell off other assets to stymie that loss.

At the end of the day, there will always be risk in investing. The bigger the risk, the bigger the blow your credit score could take if things go sideways. It is highly advised to complete solid due diligence on an asset before purchase, weigh the costs against your reserves, and make sure you have an exit strategy that allows for a smooth transition.

All that being said, communication is most likely the best route to take when protecting your credit. Fully understanding the bed you are getting into, and weighing the risks against your failsafe’s, will help to prevent damage to your credit score and keep your investments as safe as an investment can be.

There are a lot of people that just don’t have the information to ask for the help they need. The CARES Act is designed to help. Click here ( https://www.sbc.senate.gov/public/index.cfm/guide-to-the-cares-act )to find out how the CARES Act can help you and your small business.