Why Credit Planning Is a Cornerstone of Financial Stability

 

While it may seem less glamorous than other aspects of financial management, effectively planning for your credit needs can be the difference between financial security and unexpected challenges down the road.

 

One common misconception is that credit planning is only necessary for individuals actively seeking loans or mortgages. In reality, it extends much further. Credit planning encompasses assessing your borrowing capacity, maintaining a healthy credit profile and strategically leveraging credit when needed.

 

Let’s look at why credit planning is an essential part of your financial strategy.

Three reasons why credit planning is critical

It opens up opportunities

Proper credit planning enables you to seize opportunities that require financial leverage, such as investing in real estate or funding a business venture. By understanding your credit options and maintaining a strong credit history, you position yourself to capitalize on favorable terms and access capital when needed.

 

It offers financial flexibility

Life is unpredictable, and unforeseen expenses or opportunities may arise. A well-thought-out credit plan provides you with the flexibility to handle emergencies, bridge temporary cash-flow gaps, or take advantage of time-sensitive investments without disrupting your long-term financial goals. Maintaining available credit as opposed to relying on cash for liquidity in the case of an emergency allows you to keep your capital invested and working for you.

 

It enhances your creditworthiness

Consistent credit planning involves managing debts responsibly, making timely payments, diversifying credit sources and maintaining verifiable income. These steps not only improve your credit score but also enhance your overall creditworthiness, making you an attractive borrower to lenders when seeking larger loans or more favorable interest rates.

 

Without good credit planning, pitfalls could be ahead

Consider this scenario: You have worked hard, saved diligently and maintained strong credit for years. You are able to retire debt free and feel financially secure. Shortly after retirement, you decide it is time to buy a second home or an investment property. You go to the bank to get a loan, so you don’t have to liquidate your investment accounts, but the lender tells you  that you don’t qualify. The issue? Despite your significant assets, you don’t have the income to support your request.

 

This example highlights the critical role of credit planning, especially during major life transitions such as retirement. By proactively considering your future credit needs, maintaining a healthy credit profile, and exploring options like a Securities Based Line of Credit (SBL) or a home equity line of credit (HELOC), you can avoid such pitfalls and maintain financial flexibility in all stages of life.

 

Incorporating credit planning into your overall financial plan is not just prudent, it's essential for financial resilience and agility. Whether you're navigating major life transitions or seizing investment opportunities, a well-executed credit plan can be a valuable asset in achieving your financial goals with confidence and stability. Working with a Wealth Advisor who understands the importance of the role that credit can play in a comprehensive financial plan can make the difference in realizing these goals.