Tuesday, 22 April 2014

Credit Smoothing.

Let us take two people with identical incomes and expenditures. Person A has a balance that fluctuates between £1000 and minus £900. Person B has a credit balance of £100 that remains steady through the month. Who will do better in life? Person B. 

By stabilising our income we may improve our credit rating and reduce interest costs.

The reason is that person B seems to be able to live within his means while person A seems to live from crisis to crisis.

This is despite the fact that the mean balance remains the same in both cases- and that income and expenditure is identical.

The difference is that person B has matched his income and expenditure to one another so that bills are paid at the beginning of the month (while money is in the account) rather than at the end when it is not.

In addition to having a good credit record person B will also have a stress free life, pay no bank charges and be less prone to irrational purchases.

A photo posted by Richard Ford (@richard.ford) on
The Oxford canals are a place of peace. A place to dream of Nobel prizes!

£1000 in the account tends to make one feel richer than one really is- and therefore tempts one into buying things one should not.

It is not hard to become person B. I have done this myself through the following methods.

  • Change the payment day of all standing orders and direct debits to the day after pay day.
  • Open a deposit account and have the bank sweep excess funds into it. This makes me feel poorer than I really am on pay day and means I have a reserve in the event of unexpected setbacks.
  • Maintain a float in my deposit account that equivalent to what I owe on my credit card. Pay off one with the other when the time comes. This means that I can borrow money from the bank at zero interest (no interest is due provided the bill is paid in full) while lending the same money back to them at interest!
None of this is rocket science but few people take the trouble of doing so.

No comments:

Post a Comment

I moderate the comments for spam but welcome contrary viewpoints.