Managing credit is a big part of financial health. A good credit score can help you secure better interest rates on loans, prove financial responsibility to lenders, and more. But if your credit score takes a nosedive, it can have an adverse effect.
Learning how to manage credit may not come naturally to all, but with helpful tips and habits, everyone has the opportunity to succeed. Read on for our tips to help manage credit wisely.
Create (and Use) a Budget
Making and spending money are a part of life, but the most important part is managing the money you have. Budgeting is an essential tool for financial management and using one can help you properly track and allocate funds to essentials, loans, savings, and more.
If you’re already utilizing a budget, great, you’re on the right track. But if you aren’t, use our 5-step guide to creating a monthly budget. Utilizing financial resources can help you stay on track to ensure you don’t overspend or under-save. This is especially important when it comes to managing credit cards because it can help you visualize how much money you have to spend, what your debt-to-income ratio is, and more.
Live Within Your Means
Another important aspect of managing credit is knowing how to live within your financial means. Using a budget can also help with this.
A good rule of thumb is to use your credit card like a debit card – only use the funds you can afford to pay back every month. By doing this, you can build credit without breaking the bank and mismanaging your debt. On many credit cards, you will also earn cash back for spending on things like gas, groceries, and other essential spending. Just be careful not to spend because of the rewards – that is counterproductive.
Another way to use a credit card is for emergencies only, such as a vehicle repair or medical expense. Next, you will use your budget and a repayment plan to ensure the large expense gets paid off quickly without accruing interest. If you let it sit too long without making payments, your credit score will start to drop, and interest will accrue.
Pay Bills on Time
An important factor that contributes to your credit score is whether you pay your bill on time. All credit cards have a minimum requirement for payment, but it’s usually a lot less than what’s spent on the card.
Make sure you are paying more than the monthly minimum, and zero out the balance every month if you can afford to. If you can’t, utilize your budget and create a payment plan to ensure you can pay off the credit card before you pay too much in interest. Missed payments will also cause your score to drop, which can make other financial ventures more difficult, such as purchasing a home, getting a good interest rate, and more.
Review Credit Report Annually
Make sure to review your credit reports annually. Doing so will help you catch potential errors, such as fraudulent accounts or loans that are shown as “open” when you’ve already paid them off. You can also review your name, address, employer, marital status and more to ensure everything is displayed correctly.
Companies like Experian and AnnualCreditReport.com offer free copies of your credit report. Get in the habit of reviewing the report annually to ensure your financial snapshot is accurate. If it isn’t, contact your financial institution and lender to help you resolve the issue.
Having good credit is essential to all aspects of personal finance. It can help you secure better interest rates for loans, such as a mortgage or car, and help you get approved for additional credit cards if you need them. Read our blog, Understanding Your Credit Score to learn more about how your score is calculated and how it impacts your finances.
The tips above will help you manage your credit, but if you would like to learn more about how your credit score works, what affects it, and more, read the Slavic401k blog here.