Have you wondered why is credit such a big deal? Why do we get so nervous when someone runs our credit report? Is it more important for you to have money at the end of the month or a good credit score? I've always wondered if I should even care about credit if I had cash. If I had enough cash couldn't I just buy a car instead of financing it? I've decided to compare credit to cash flow and determine which is better.
Why do you need credit?
The point of credit is to prove whether or not you can be trusted to pay back a borrowed sum of money or an expense over time. Your credit affects your ability to finance a house, a car, or a business. Some employers may even pull a credit report as one of the determining factors of your employment; if your debt is higher than the income they are offering they may not consider you for the position. Even the utility companies may not turn on your lights if you have a poor credit rating. So it is important to have good credit if are looking to borrow money or services.
What does cash flow mean?
According to Robert Kiyosaki, cash flow is your money moving through your income & expenses known as your income statement and assets & liabilities known as your balance sheet. So you earn an income, however you do, and you either spend it on living expenses, purchase an asset, or purchase a liability; that is explained better in the video I reference from Robert Kiyosaki.
A poor person's cash, flows in from income-producing activities and out through expenses leaving little or no money left over for assets or liabilities. A middle-class person's cash, flows from income-producing activities and out to expenses and liabilities, but not usually assets. A rich person's cash, flows in from income-producing activities and/or assets and out to assets, expenses, and liabilities. Cash flow is how your cash moves through your financial statements. Positive cash flow is cash that allows you to purchase assets which pay for expenses, liabilities, and more assets. Negative cash flow is cash lost to expenses and liabilities.
So which is more important credit or cash flow? The answer is obvious; both! Good credit is proof that no matter how much money you have you always pay your bills and debt expenses on time and should be trusted with a loan. Positive cash flow allows you to purchase assets that put money into your pocket. So if you have both good credit and positive cash flow you are trusted to use other people's money to purchase assets. I would argue that it is important to obtain positive cash flow first because it will allow you to build good credit.
What do you think? Did you learn something new? Do you believe credit is more important than cash flow or is it the other way around? Which one would you say you need first? Let me know your thoughts in the comments below.
- Irby, LaToya. “5 Reasons Why Having Good Credit Is Important.” The Balance, www.thebalance.com/reasons-why-good-credit-matters-960178.
- Kiyosaki , Robert T. “HOW TO CONVERT A LIABILITY INTO AN ASSET- ROBERT KIYOSAKI.” YouTube, The Rich Dad Channel , 30 Mar. 2018, www.youtube.com/watch?v=A8vD_XO0vUU.