(ARA) – The Great Recession inspired many to better manage their finances by cutting spending, saving more and tackling debt. But one aspect of good personal financial management may be harder for many to manage – understanding their credit.
That could be because many of us don’t fully grasp the mechanics of credit scores and credit reports. You may realize that having good credit can profoundly affect your financial health, but you may not be sure how to take control of your credit.
Fortunately, it’s not difficult to demystify credit management. A few simple steps can put you on track to take control of your credit this year.
Know where you stand
Your first step toward a healthier credit future is to get a clear perspective on where you are now. If you haven’t looked at your credit report in a while, now is the time. Websites like CreditReport.com allow you to obtain and review your credit report – a move that can empower you to make better financial decisions. You’ll get your free credit score as a reward for enrolling in Experian’s credit monitoring product, a membership that can help keep you abreast of changes – both good and bad – in your credit report and score.
By monitoring your credit report and score on a regular basis, you’ll be better equipped to make financial decisions, and will be more aware of your ability to use credit. Get educated on what’s on a credit report and how credit bureaus use that information to calculate your credit score. Generally, credit reports include detailed information of an individual’s payment history with various creditors. Among other factors, bureaus consider three key things when calculating your score – the length of time you’ve had credit, the ratio of available credit to credit used, and if you pay your bills on time.
Manage your debt
At a time when debt is high in many American households, it may be difficult to remember that not all debt is bad. Debt that is secured by a tangible asset, such as a home loan, or that builds your family’s future, like a college loan, can be good debt as long as you manage it wisely. When looking for a mortgage or college loan, start out by knowing your credit score, then shop around for the best rate and terms. And be sure to avoid borrowing more than you can comfortably repay.
Pay down credit card debt, which is generally perceived as higher-risk – and higher interest – debt. Avoid using credit cards to pay for things that you should be paying cash for, such as groceries, utilities, restaurant meals or vacations. If you use credit for these things, which rapidly get consumed, and you can’t pay off your bill in full right away, you could wind up in debt very quickly.
If you already have credit card debt, never pay just the minimum balance due each month; it would take years to pay off just a few thousand dollars at that rate and you’ll pay much more in interest than the amount you originally borrowed. Always pay more than the minimum, and concentrate on paying off cards or loans with the highest interest rate first.
One exception to the pay-it-off quick rule may be your mortgage. If you’re able to make your monthly mortgage payments without struggling, concentrate on paying off other, higher interest, unsecured debt first. The interest you pay on your mortgage may be tax deductible, but the interest you pay on credit cards is definitely not. If your mortgage’s interest rate is high, look into refinancing to lower the rate.