Protecting Your Credit: A Guide for Investors

Understanding 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 repay a lender or borrower, mostly with interest. Your credit score (TransUnion, Equifax, and Experian) will show lenders/sellers your creditworthiness 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. 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.

Protecting Your Credit

So, how does one protect themselves from this happening?

Step 1: Communication with Your Lender

Communication with your lender is paramount. If your ability to repay 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 repayment (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 repaying 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.

Emergency Reserves and Asset Liquidation

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 repay, you can sell off other assets to stymie that loss.

Risk Management in Investing

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.

Conclusion

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 failsafes, 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 to find out how the CARES Act can help you and your small business.

Stay safe, but not too safe.