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Calculating your own net worth gives a picture of how much money and assets someone has versus how much they owe. On the face of it many people look extremely prosperous as they drive expensive cars and live in big houses, but this is no real guarantee that they have a high income-to-debt ratio. They may look like a good potential customer or business partner but are they really?

You Will Need:

A calculator.
Paper and pen.
Internet access.
A telephone.

Step 1

Start with yourself to understand this concept. Spend an evening calculating your debt-to-income ratio. This compares debt to income. For example: say your monthly income is $2000 and you have $600 outgoing in debt repayments, your debt to income ratio is 30% (600¸2000=. 30 or 30%). Wise financial pundits say this figure should never be above 35%. I wonder how many can claim that in this day and age? By keeping an eye on this ratio you can see your level of indebtedness and nip overspending problems in the bud. If the ratio begins to rise, notice where you are overspending and stop! A spreadsheet or financial planning program is very helpful here.

Step 2

If you want to see someone else’s credit score before doing business with them, is another matter. If the person is a potential customer who wants to establish a line of credit, you can simply ask them to provide you with a credit reference before taking them on. If somebody has a good credit record this will not be a problem except with the most sensitive of individuals. Either way it’s a win/win situation. If they can’t or wont provide you with a credit history then ask yourself if you want to do business with them anyway?

Step 3

You would still like to consider the person from a business stand point but feel it is disrespectful to ask for a credit score. Then you will have to contact one of the credit reporting agencies the oldest of which is Equifax. You will find it easily enough on line. They will sell you a credit report on somebody else and you will be able to use the information to evaluate the risks involved in doing business with the individual in question. There is also an online service that provides the same information; this is known as’ Equifax Credit Watch’. Be careful, snooping around without asking the individual’s permission is technically against the law and if he or she finds out they can sue you and seek statutory damages. It is best to be up front and tell them that you propose to run a credit check on them.

Step 4

Armed with this information you are in a place to make a decision as to whether you want to have dealings with the person. If as in the case of a customer, you will have to write to them telling them why you are refusing their application for credit. In other words you are not interested in providing a monthly account and they will have to pay up front for anything they buy from you! This can be done nicely, perhaps even offering a cash discount that will frequently save the day. Be careful though, because these people are legally obligated to know where you got your information. By the way legislation dictates that you are not allowed to let previous bankruptcies enter into your decision.

Step 5

In the case of a business partnership or some other deal, you can probably just walk away in the light of the information, simply saying you have had second thoughts.

Tip:

Many people depend on their gut reaction and often they live to regret their decision. Taking a few simple precautions can save a lot of future heartache.

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