4 authors on how better credit can make you happy
By Cathleen McCarthy | Published: April 19, 2016
Money may not be able to buy you happiness, but many Americans believe that having access to it when you need it can.
A third of Americans are dissatisfied with their credit scores, according to a December 2015 survey by Chase – up from 24 percent in 2014. Twenty-eight percent don't feel confident their current score can help them accomplish their financial goals. Three in five believe a higher credit score would make them happier.
So many books have written about the psychology of happiness in recent years, CreditCards.com decided to put it to four authors, whose books include both happiness and personal finance issues. Their common question: Is better credit a key to happiness?
The consensus is yes – if you approach it the right way.
Face the music. When people start to fall behind on their bills, a common reaction is to stop looking at them – and their credit, according to Michael Norton, a professor at Harvard Business School and co-author of “Happy Money: The Science of Smarter Spending.” “You could say, well, people should just pay off their debt and stop worrying,” Norton says. “But what many actually do is to start throwing their credit card statements away. Of course, that just compounds the debt and the worry.”
Get yourself off the couch, go to your laptop or phone, and find your score.
Personal finance author
Two out of five Americans don't know their credit score, Chase found, and 20 percent say they don't want to know, for fear the number will be low.
Solution? “Get yourself off the couch, go to your laptop or phone and find your score,” says personal finance expert Farnoosh Torabi. “Make sure it's a FICO score because that's what the majority of vendors look at. You also need to understand the context, so you should simultaneously pull your credit report.”
American consumers can access their credit reports free, once a year, from AnnualCreditReport.com, and you can purchase your FICO score for about $20. An increasing number of credit card issuers offer free credit scores, as does our service, My.Creditcards.com. The score tells you if you're a good or bad credit risk. Factors listed in the reports show what you need to do to bring it up.
Put a plan in place. “When things happen that shake us to our core – we lose a home or a job, can't keep up with credit card bills – it threatens our image of who we are as people,” says Michelle Gielan, author of “Broadcasting Happiness.” “The more we focus on things we can control, like making small payments, the more we move our brain out of that stressed position and into a position where we can actually create positive change.”
Gielan recommends meeting with a financial adviser to help you put a solid plan in place. “The first and most important step is to understand what you can and can't control,” she says. “If your home is being foreclosed on, that's done. There's nothing you can do at that point. What you can control is making that $25 payment on your credit card. From a psychological perspective, it's about giving your brain small wins.”
Set up bill payments, then chip away at debt. Fastest way to improve your credit score? Pay your bills on time. Payment history is the largest factor in your FICO score, accounting for 35 percent of it. “The surest way to make sure you're on time is to automate your payments,” Torabi says.
The more we focus on things we can control, like making small payments, the more we move our brain out of that stressed position.
|– Michelle Gielan
Author, “Broadcasting Happiness”
The next biggest step, she says, is to reduce revolving debt, which is mostly made up of credit card debt and lines of credit. Student loans carry less weight because they're installment loans. “In general, paying off loans works in your favor, assuming you're in good standing. You just need to make that credit-to-debt ratio as low as possible,” Torabi says. “If you have to carry a credit card balance, ideally it should be lower than 10 percent of your available credit.”
Delay gratification for compound return. “People would be happier, and in the long run wealthier, if they bought basic, functional appliances ... and invested the money they saved for future consumption,” wrote Jonathan Haidt in “The Happiness Hypothesis.” “Yet Americans, in particular, spend almost everything they have – and sometimes more – on goods for present consumption, often paying a large premium for designer names and superfluous features.”
Impulse buys offer a quick lift, but drag you down if you charge more than you can handle. Happiness researchers agree that delaying gratification is far more effective for building and sustaining joy – and improving your credit score is an exercise in delayed gratification.
“Swiping for what you want and paying for it later seems terrific until you look at the research on how we really work psychologically,” says Norton. “Turns out, a looming debt due at some point in the future ruins our happiness in the moment. We spend all our time worrying about the debt instead of just enjoying what we purchased.”
How to resist the retail therapy trap? Minimize what you buy on credit. “Certain things, like student loans, you have to pay on credit,” Norton says. “But there are many purchases we put on our credit card out of habit that, in fact, we could pay for upfront. If we can get them off our psychological ledger, not only would we be happier at the moment – because we're not incurring more debt – but happier in the long run.”
Don't just complain; brainstorm. Venting about your credit woes can set you back, unless you use the opportunity to inspire action. Gielan teamed with husband Shawn Achor, author of “The Happiness Advantage” and popular TED Talk speaker, to study how mood impacts productivity. They discovered discussing solutions, rather than just complaining, led to as much as a 54 percent more positive outlook and increased problem-solving ability by 20 percent.
Turns out, a looming debt due at some point in the future ruins our happiness in the moment.
Prof. Michael Norton
Author, “Happy Money”
“For people facing financial stress, just focusing on the stress is really bad for you,” Gielan says. “But focusing on the stress and investigating solutions at the same time has a tremendously different effect.”
Seek out success stories. Research shows it's empowering to seek out stories of others who've overcome obstacles we face, Gielan says. “Fill the brain with hope and possibility,” she advises. “If you have $25,000 in credit card debt and don't know what you're going to do about it, look for stories of people who've been through that exact circumstance and are now thriving.
”It's important not only to understand the mechanics of how they got out of the situation, but also to see that this is not the end of the story. It's just the beginning,” Gielan says. “Hope can actually start to fuel you. Today you're not in a great place, but if you do X, Y and Z, if you keep at this, you can get where they are, too.”
Focus on what you can control. In the end, happiness experts say, the only economy we control is our own – and improving your credit score is a great place to start.
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