Your Credit or Your Life

Post date

22 Nov 2011

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During the last months I've been exposing myself more to the entrepreneur world. I am not sure if this is one reason for which more people is asking me about becoming a freelancer or building a new startup. Todays post is not only for all of you wannabe independent out there, it also applies to anyone concerned about how money affect life.

If you are planning to take the lead of your career you will find plenty of literature out there and blog posts. Let me summarize most of what I learned about life and money so far.

The most expensive things in life are:

Laziness

Ignorance

Rush decisions

You alone are responsible for covering those points because no one will solve them for you. The bad news are that it might take your whole life getting it right.

I have noticed one difference between Americans and Europeans, it might be one of those things that the American school system implanted into my brain, which could explain why I am so concerned about it: Most Europeans completely underestimate the importance of good credit.

People building their own company are all the time leveraging credit on their side and use it as one of their most valuable tools. Great ideas cannot wait to be implemented until you grow the money, neither good opportunities are open for too long.

The other people who do not have to deal with banks so often, ignore such nuisance convinced that solid private finances are only about being solvent: saving some money in a bank account and never spending what they do not have.

Anyone wanting to fly solo, must learn more about private finances. Forget about a rent or public health care, you are completely on your own and better be ready to know what to do with that extra money. You must learn something about savings, taxes, investment and credit. The later is the one people usually neglect, so that is the only thing I want to write about.

Nobody like the idea of the extra money gone with a loan. They rather pay in advance everything and assert the idea of how evil and stupid borrowing money is. Yeah, to the hell with credit... this is what most freelancers never think/care about before jumping on the entrepreneur bandwagon. They do not notice how their credit score sinks deep into hell until it is too late.

What are the implications of that stupid thing about credit? Well, if you try to upgrade your phone contract you might be surprised that you cannot get it. Your phone company will check your credit, which reflects your non permanent job status and decide not to risk themselves giving you a phone that you might not pay, even if it is free with a 10€/month contract.

Since you are new into freelancing, you might decide to spend a lot on new gadgets, office stuff... maybe go wild and decide to pay 600€ in 12 smaller payments. Guess what, you will not get it. Even if you had 100 times more money ready in your your bank than the money you ask for, nobody will trust you, not even your very own bank. For them you are Mr Nobody and Mr No Job

Companies do not care at all how much money you have saved, they have no idea of how free you are to use it. So stop dreaming about solving your problems sending them your last balance, it will just not work. What they care about is your financial experience and commitment paying debts, how often and how much other institutions trust in you: your credit history

If you ever plan to buy a house, buy car or face a medical situation where the best solution is not paid, you will need to ask for a loan. Having bad credit does not mean that no one will give you money, only that you will have to pay much more. Loan interest rates can move between 6% to 30% depending on your credit score. If you are not good at financial math, you should know that a 10 year loan at 6% with monthly payments mean that at the end you pay back to your bank the money plus 33% in interests. With a 30% loan you pay 216%. If you are surprised with these numbers or do not understand why 5 times more of interest rate cost you 7.2 times more wait until you need a loan.

Being independent means that most likely your whole life your credit will be worst than a normal person with a permanent job contract, paid insurance and paid retirement. Even if you had 1,000 times more money in your bank account than them. In the very moment you become a freelancer, you will stink to every bank on Earth.

Giving advice about improving your credit is difficult because it depends on the country and so far it is not something traveling with you to a new country. These are some things for improving your score that usually work everywhere and you should do before quiting your job.

Ask your bank for an increase in your account overdraft margins. Anybody should maximize this once a year. With time and a good credit you should get them between 6,000 and 10,000 margin, but normal employed people who never cared about credit will likely get 500 worth trust their first year. Offer them to accept higher overdraft fees in exchange of a wider margin, but never ever use it.
Get yourself a credit card or two. Prepaid ones do not count, only real ones, however can use them without the credit part.
Make a phone contract where you must pay a minimum every month. Mostly anything with your signature and commitment to pay will work, even your electricity bills.
Next time you are offered buying something with monthly payments, say yes.
Never close an account or contract where you were trusted money or your commitment to pay without thinking twice about it. Once you close it, your whole credit history related with that contract will vanish.

The above points are things that any financial institution can research about you. Ask around for your local credit agencies and ask them for your credit history and learn what they are tracking and what you can improve.

Financially most people strive only for economic independence, the bye mom and dad level. Next level is when you are able to afford a family. There is one more personal finance level which you should never lose the sight of: the economic freedom level. That is when you reach a point where you neither suffer nor endure nuisance bringing home a paycheck. You still work for one, but you do not suffer for it and do not care if your lifestyle is the same as now for the rest of your life.

You can either be born with money, inherit it, marry it, steal it, work for it or a combination of that. Most people spend half of their life destroying their health for money and the other half destroy their savings with their health costs. However some decide to live working on something they love without dreaming for retirement. It is not only having luck neither being independent, although that helps a lot. It takes some self reflection too on what you really want and some effort on learning how to deal better with the money you make. At the end, the economic freedom does not only take money, but also experience and maturity. Usually that also takes longer than you might expect.

The Digital Lumberjack

Hacking Code When Life Goes Digital