We're more than halfway through July already, and I’m back for round three of our Financial Wellness Blog Series. Today, I’m tackling the topic of debt and how you can effectively manage yours.
Just about all of us have outstanding debt in some form or another, but not all debt is necessarily bad. However, when you don’t have a plan to manage your payments and balances, your debt can quickly take on a life of its own. In the current economy, with inflation pushing up everyday costs and the Fed raising interest rates to fight inflation, you’re more apt than ever to sink deeper into debt. Before you start treading water, here are some tried and true tips and small steps I recommend you implement to make managing your debt more effective.
Making Payments
Did you know that your payment history is the most important factor in calculating your credit score? If you didn’t know, now you do, and if you’re a numbers person, your payment history accounts for over a third of your overall FICO credit score. That’s a huge portion of your creditworthiness!
Lenders report to the credit bureaus when a payment was received on time, 30, 60, or 90 days late, or never received, which serves as an indicator of the likelihood that you’ll pay your debts as agreed upon. Not only is it crucial that you’re making your payments on time to ensure that your credit score isn’t negatively affected, but you could also suffer late payment charges from your creditors if they aren’t. In the current economy, every penny counts, and no one should spend their hard-earned money on unnecessary fees.
In addition to making your required payments on time, try to pay more than the minimum if you’re financially able. Not only does this help you pay down your debt faster, but it’ll save you money on interest and may improve your credit score.
Pay off High Interest Debt
If you haven’t taken inventory of your existing debts in a while, now’s the time. Federal law allows you to get a free copy of your credit report every 12 months from each credit reporting company (Experian, Equifax, and TransUnion), so take advantage and get a copy of yours.
If you have one or multiple high-interest loans, as I previously said, consider paying them off faster by paying more than your minimum required monthly payment. Or think about consolidating them into a single loan with a lower interest rate. With a debt consolidation loan, you can manage your debts more easily since you’re only making one payment to a creditor rather than several payments to several lenders. And, if you’re able to get a lower interest rate than you currently have, you’re paying less to interest.
If you have a student loan, find out if you’re eligible for federal loan forgiveness programs before including them in a debt consolidation loan.
Think Before You Take on More Debt
Credit cards and loans are easily accessible these days, and you can feel encouraged to take on more debt than is financially healthy. Before you drive that top-of-the-line new car off the lot or decide to take your family on an extravagant European vacation, ask yourself the following, “Do I need to make this purchase, or do I simply want to?”
Most of us rely on our vehicles to take us to and from work and so much more. So, if your fifteen-year-old car is constantly in need of repairs, it may make sense to purchase a new (or new to you) vehicle instead of being nickeled and dimed to death. However, is it necessary to purchase a brand-new car with a price tag over $45,000 that you really want, or a more practical idea to go for the used one under $20,000 that you really need?
Keep in mind that having too many open accounts with balances can lower your credit score and may become difficult to manage, so it’s best to think before you act. If you determine that there’s truly a need and not just a want when taking on additional debt, I highly recommend speaking with your primary financial institution (PFI) to apply for the loan. I hope that GOLD is your PFI, but whether it’s GOLD or another financial institution, speak to them first regarding your lending needs. If they are anything like GOLD, they will sit with you one-on-one to discuss your options and advise you earnestly.
Start an Emergency Fund
Having an emergency fund may not fully cover the cost of a new vehicle or other large, unexpected expenses, but it can cover smaller expenses that pop up.
Figure out how much and how often you can afford to save and work on building an emergency fund. Start by saving small amounts in an interest-earning account that allows you to access your money quickly and work toward accumulating a balance equal to three to six months of your living expenses. This will give you peace of mind and may help you avoid the need to take out a new loan should a larger expense rear its ugly head.
Recognize When You Need Help
We all need help at times, but it can be hard to admit it and ask. If you find it difficult to pay your bills each month, consider seeking outside help, such as contacting our experienced team or a debt counseling service. Debt counselors can help you better understand your current financial situation and offer debt management options to help you gain your financial independence.
If you’re uncomfortable with or just not ready to talk to a debt counseling service yet, contact your creditors to discuss your payment plan options. They may be willing to set up a repayment schedule that’s more realistic for your budget.
Ultimately, how you decide to manage your debt is up to you, but I hope you find some, if not all, of these tips helpful. No matter which methods you choose, if you’re taking steps and sticking to them, you’ll start to see progress!
I’ll be back in September with another Financial Wellness blog. Until then, from all of us at GOLD, have a great summer!