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Consumer Buying Power & Credit Score: What’s the Difference?

By August 15, 2019 August 26th, 2019 No Comments
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Credit score and consumer buying power work together, but also stand alone. Confused?

These two financial concepts are “must-know” concepts for all consumers. Both have influence on overall financial decisions, and both contribute to lending decisions. Briefly, credit is a structured accounting of your past financial dealings, with a score attached based on those dealings. Consumer buying power is your ability to take on debt. While your score factors here, things like income and debt-to-income ratio also come in to play. Your buying power may be better than you think, even if you sport a low credit score.

If you are unsure of what the difference between credit score and buying power is, you’re not alone. Most people are unaware there is a difference. Often one is confused for the other. The fact is, both are important to your financial success, so it’s in your best interest to understand both concepts.  

Rest assured that this article is designed to help you grasp the core concepts of consumer buying power and consumer credit scores. Even though these financial concepts are quite different from one another, they work cohesively in your overall financial wellness… for better or worse. 

What Is Consumer Buying Power

In lay terms, buying power is the value of money; it determines how much value an individual can get from a particular currency.  A decrease in buying power is called inflation.  In order to fully understand a credit score, first understand what buying power is. 

This concept essentially refers to the capacity of a consumer or particular market in buying products and services. A high consumer buying power occurs when individuals have a higher bracket of income and a higher purchasing power ratio (ratio of income to current debt).  Markets that have a high buying power will commonly have a stable economy and developing lifestyle, which allows consumers to get the most value for their money.  

These income groups have a steady source of revenue and their net worth is quite high on average. On the other hand, a low buying power occurs when individuals have low income and their disposable income is not enough to make ends meet. These markets often have high unemployment rates, high inflation rates and the standard of living keeps diminishing as the buying power decreases.

The Significance of Understanding Consumer Buying Power.

An individual’s buying power often comes in handy when looking to purchase a product with a heavy price tag. Many people are not fully aware of this, but every individual is able to boost their respective buying power. Even if you carry a less than perfect credit score. If you’re a consumer who struggles  with poor credit, it’s even more important for you to understand buying power. 

With a low credit score, consumers face a struggle to get approved for new loans or lines of credit. Buying power looks at the amount of money you make, and compares it to your current debt and expenses. This ratio is another piece of the puzzle that creditors use to determine your overall lending reliability. If you have a low credit score, do your best to maintain a low amount of debt and a decent income. This will at the very least give you a favorable debt-to-income ratio. This shows lenders you’re capable of paying credit back.

This is how a credit score and buying power work together. If one is lacking, a better rating of the other can certainly help in some cases.

What Is a Credit Score? 

By definition, a credit score is a three digit number which is used to evaluate a consumers credit worthiness. This score is entirely based off your overall credit history. Thus, when a lender is deciding to lend finances or capital to someone, the first step is to check the applicants credit score and report. This information is what’s used to decide if a consumer is trustworthy based on past financial dealings of similar nature.  

Simply put, your credit score is reviewed by institutions who want to know how punctual an individual is when it comes to debt payment. Financial institutions, such as banks, will make use of this score to evaluate the risk and to mitigate their potential losses. A consumer’s credit score to determines if they qualify for a loan, the rate of interest and the appropriate credit limits. 

Credit scores are also used by mobile phone companies, property owners, insurance companies and government operated organizations, before they make financial decisions. Anytime a person or business is entrusting you with their property, or lending to you, it’s likely they will check your credit first. 

What Is the Real Difference Between Buying Power and Credit Scores?

By now, if anything is evident, it is the fact that buying power and credit score are two entirely different concepts. However, there’s a good deal of convergence between the two when it comes to making a purchase . One refers to the value you get in exchange for your money, and the other refers to how lenders view and value an individual, in terms of your credit worthiness.  

Although they are entirely different concepts, your credit score can and does have a huge impact on your purchasing power. Any time that you plan to make an expensive purchase, take a loan, or even think of making an investment, expect your credit to be checked. 

Additionally, in the case that you have a low credit score, you are likely to receive a higher interest rate. Ultimately, this will reduce your buying power, as lenders will see you as a high risk investment.

So now you know what the difference is, how do you increase it?

How to Increase Your Buying Power

In order to increase your buying power, many believe that it is important to maintain an excellent credit score. However, this is not the only way to increase consumer buying power. Here are some ways to ensure that you are able to cause your buying power to increase effectively: 

Raise Your Credit Score

Many experts state that the best way for any individual to increase their buying power is to maintain a high and spotless credit score. Credit score is calculated by financial institutions when giving out loans to individuals, these firms will consider your debt and the rate at which you pay loans and expenses. So if you want more value for your disposable income, consider increasing your overall score. 

Add More Revenue Streams

Increasing your income will inherently increase your disposable income. When an individual is earning a higher amount, they are likely to make more purchases due to the high disposable income. This allows you to purchase higher price bracket products without hampering with or causing interferences in your monthly budget. Having more income at your disposal also allows you to invest in higher priced products, such as property or expensive cars.

Increase Your Down Payment

Another step you can take to increase your buying power is thinking about the down payment of a home. Consumers who are interested in buying property should focus on a down payment. This will help to offset the low score or buying potential.

How Can You Calculate and Increase Your Credit Score? 

Calculating credit score requires one to have a high degree of knowledge regarding accounting equations and concepts. If you want to know your credit score, there’s multiple ways to obtain a free copy. Normally, no bank would refuse to provide you with a statement of your credit score. 

In order to increase your credit score and buying power, consider the following steps. 

  • Monitor your credit score 
  • Make payments on time 
  • Pay off old debts 
  • Increase your monthly payments 
  • Use your credit wisely

Ultimately, consumer buying power is influenced by an array of different factors, but your credit score also plays a huge role. Specifically in the value you get in exchange for your money. You should take all necessary steps to increase your credit score.  This number, combined with your buying power help to stabilize for financial outlook. Making less surprises when the time comes to borrow, or pay back.

As always, if you find yourself in a position of high interest debt and only able to make small payments, please contact us. High interest and low payments cause perpetual debt. Our program ends the cycle of high interest debt by negotiating directly with your creditors to save you money. Speak to one of our licensed debt consultants today

 

Your partner in debt relief,

Consumer First Financial