Credit Card Debt

How to Improve Your Financial Health

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Whether you’ve been at it for a while, or you’re just starting to learn about personal finance, managing your money can be taxing. How important is your credit score? How is it calculated? What can you do to enhance your financial wellbeing? The following tips could help answer these questions and help you improve your financial health overall.

Know how credit scores work

Your credit profile is one indicator of your financial health. Most people know that a higher credit score means that they will qualify for loans, credit cards, and mortgages more easily and at lower rates. But many people are never told how credit scores are calculated.

Credit scores are used to determine a borrower’s likelihood to pay back a lender, and the most widely used one is the FICO Score. All three credit bureaus—Experian, Equifax, and TransUnion—use this data to determine a score. So, whenever you hear “FICO score,” “credit score,” and “credit rating,” they all refer to the same thing.

Credit scores can range from 300 to 850, based on credit history and habits. Here is the breakdown of how credit scores are calculated:

Factor Positive Impacts Negative Impacts Contribution
Payment History Consistently paying bills on time Delinquencies or missing payments 35%
Credit Utilization Having a debt-to-available-credit ratio below 30% Having a high debt-to-available-credit ratio above 30% 30%
Length of Credit History Keeping accounts in good standing for a long time Opening several accounts all at once 15%
Credit Mix Using different types of credit, like credit cards, loans, and secured debt Having little or no credit variety 10%
New Credit Applications Seeking only one new type of credit at a time Applying for many different types of credit in a short amount of time 10%

Once a year, you can request a copy of your credit report from all three bureaus at annualcreditreport.com. After accessing your free credit reports, you can review the information on the reports, make sure it’s correct, and dispute any false information.

If you do see inaccuracies on any of your credit reports such as a wrong address, missed payment, or incorrect outstanding balance, use the information on their website to contact the credit bureau and ask them to review the mistake. Under the Fair Credit Reporting Act, credit bureaus must investigate any disputed items and remove them if they are incorrect.

Spending just a few minutes reviewing your credit reports could protect you from identity theft and keep you on track to improve your financial health.

Make a budget

Evaluating your financial situation is the best way to make sure you’re practicing good habits and protecting your credit score. And happily, you don’t need an expert to review your personal finances to get started. All you have to do is create a budget.

First, make a list of all your monthly expenditures, such as housing, transportation, food, utilities, insurance, childcare, etc. Then, calculate your monthly income after taxes and subtract that total from your expense total. If you have money in your budget after all your expenses, you’re on the right track with your personal finances. You can then decide where that extra money goes — for example, to savings, retirement, or to pay off your debts more quickly.

On the other hand, if you find that you’re overspending, making less than your monthly expenses, or relying on credit cards to fill the gap between your income and expenses, you’ll need to make some adjustments. Figure out what you can trim from your expenses, ways to make extra income, and alternative debt resolution strategies.

Pay more than the minimum

Also known as “revolving your debt,” making minimum payments might seem like a perfectly normal habit. The truth is, it could seriously harm your financial wellbeing in the long run. This is because if you only pay the minimum on your debt and keep using your available credit, your credit utilization will rise, damaging your credit score.

Additionally, if your debt gets too high, your minimum payments could be hard to keep up with, leading to missed payments that cause even more financial stress. Paying as much over the minimum as possible could help you avoid these problems, get out of debt faster, and start saving more money — all crucial to improving your financial health.

Start your emergency fund

Having money in savings for an emergency can help you avoid adding to your debt or damaging your credit score. Saving even 10% of your paycheck each month could save you from a huge financial headache, should the unexpected occur.

However, it’s a lot harder to save money quickly if you’re paying off unsecured debt like credit cards. This is especially true if your unsecured debt has high interest rates, because the amount you owe could go up every month. That’s why it’s so important to get out of debt as quickly as possible. The faster you’re out of debt, the faster you can build up your savings and make the types of investments you’ve been hoping for.

Give your financial health a boost

If you’re struggling with debt or worried about falling behind on payments, it might be time to take action beyond simple budgeting strategies. Freedom Debt Relief is here to help you understand your options for dealing with your debt, including our debt settlement program. Our Certified Debt Consultants can help you find a solution that will put you on the path to improve your financial health. Find out if you qualify.

John Russo is a Creative Manager at Freedom Financial Network. His goal is to make the world of personal finance more accessible so that everyday people can find the right financial solutions for themselves. In his free time, he enjoys hiking, reading pretty much anything, and spending time with his fiancée and two cats.