Credit card balances, debt, and interest rates, what do they have in common? Most people are not that interested in discussing them. Debt is a serious subject and the balance you’re currently carrying around on your credit card might be because of an emergency or from a time in your life when you were less than financially responsible. We completely understand why most people want to keep these topics to themselves, but we also think that’s so important that you are honest with yourself when it comes to debt and the health of your credit.
Your credit score and report make up the backbone of your financial life, they can make navigating through life a whole lot easier or a whole lot harder. There are a few truths that everyone needs to face when it comes to their credit score.
Truth Number 1: Your Credit Score Still Affects Your Life Even if You Ignore it
Just like the majority of your financial life, your credit score is rather easy to ignore. It’s not that easy to get a hold of and more often than not you need to pay for it. No one wants to pay a fee to see a three-digit number when they can use that money to pay for something fun. But, what if that three-digit number was the difference between you getting approved or rejected for a car loan, a car loan you really needed? Your credit score is the sum of your financial past and present and if it’s too low, you need to know before you decide to apply for a loan that requires a high credit score.
Everyone who has ever used some form of credit has a credit score that ranges from 300 to 850. If you want a healthy score, one that will afford you all the financial opportunities you want, you should aim to have a score above 650. Higher is always better, but it’s important to find balance in your finances, a high credit score is not as favorable when you’re carrying around a lot of debt.
How Your Credit Score is Calculated
The calculation of your credit score is based on 5 main factors.
- Payment History. Whether or not you make your payments on time or late.
- Debt Owed. How much debt you owe compared to your available credit.
- Length of Credit History. How long you’ve been using credit.
- New Inquiries. Every time you apply for new credit, an inquiry is made.
- Diversity of Accounts. Having more than one type of credit account is important.
Potential lenders and creditors don’t always take credit scores into consideration, but if you’re trying to get your financial ducks in a row or are looking to apply for a large loan in the future, it’s important that you know what your credit score is.
For more information on how your credit score is calculated, check out this infographic.
Truth Number 2: Accumulating Debt is The Easy Part
Not a lot of people want to admit it, but creating debt is one of the easiest things you can do. You might not even realize you’re creating debt, that’s just how easy it is. Your bad financial habits can very quickly turn from every once in a while mistakes to daily issues and before long your credit score is suffering because of it.
For the most part, the average consumer knows when to avoid making an over the top expensive purchase, but what most of us have trouble with is saying no to the small things. And it’s those small purchases and costs that really do add up. Spending more money in a month than you make is a surefire way to get yourself into debt.
Truth Number 3: Getting Rid of it is The Hard Part
On the other hand, getting out of debt is one of the hardest things you might face in your financial life. You’ll need to commit time, money, and patience into paying down your debt. Don’t get us wrong, it might be hard but it’s definitely not impossible. One of the best pieces of advice we can give you is to create better financial habits and fix those everyday costs that aren’t completely necessary. That way, once you’ve paid down your debt you’ll have some better financial habits to fall back on and won’t end up stuck under mounts of debt again.
While some debt can be managed with some commitment and effort, other debt might need some outside help. For those consumers who find themselves in an extreme situation, there are a few options to choose from.
- Debt consolidation
- Credit counseling
- Debt management programs
Set A Goal and Start Working Toward it
No matter what your financial situation is and no matter how high or low of a credit score you have, it’s always in your best interest to set at least one financial goal and work toward it. Having a plan is the best way to get your finances back on track.