Debt Management: It’s what you KNOW and what you OWE
Debt can be confusing and overwhelming if not properly understood and monitored. Provided they are not misused, student loans, a mortgage, or an auto loan can be useful financial tools to allow you to accomplish a financial goal you wouldn’t be able to do on your own.
The first step to proper debt management is before you’ve accumulated it. Before accepting credit card offers in the mail, lines of credit on a home, or even your student loans, it is critical to understand the obligation you are accepting.
Helpful Hint: Always know if your interest rate is fixed or variable, what your loan repayment period is, and if you have a prepayment penalty should you want to pay the loan off early. For student loans, be sure to understand your deferment, forbearance, or financial hardship options.
Top Ten Tips for using Credit Cards
- Be careful when using your card for every day purchases: Substituting for cash can quickly become a bad habit and result in overspending.
- Don’t use your credit cards to purchase items beyond your means: Borrowing beyond your means quickly becomes unsustainable.
- Pay more than the minimum payment; ideally pay off the entire amount each month: When you pay only the minimum, the interest rate you are charged typically adds up faster than the minimum payment.
- Pay off higher rate credit cards first: The higher rate card will cost more in the long term to carry a balance.
- Beware the payment due date: Late penalties will not only cost you money but will negatively affect your credit score.
- Stay current on all payments: Missing payments will also impact your credit and you could be denied credit in the future.
- Attempt to negotiate a lower interest rate: If you have a solid payment history, contact your bank or credit card company and ask to reduce your interest rate.
- Closing lines of credit can negatively impact your credit score: Avoid closing cards that still have a balance or those that make up a significant amount of your credit history.
- The fine print matters: Before signing a new offer, be sure to understand interest rates, grace periods and legal requirements of your payment obligation.
- Annually review your credit report: Errors are common and should be corrected immediately.
What is a Credit Score?
Your credit score is a three-digit number that ranges between 330 and 990 depending on the agency. There are a few types of credit scores available and your FICO score is the most common. Your score indicates how well you pay your bills. When you apply for credit, your credit score will be a quick way for a creditor to decide whether to extend credit. Factors that go into figuring your credit score are payment history, the amount of debt vs. total available credit, length of credit history, number of inquiries into your credit and what types of credit you have (mortgage, installment, revolving, etc.).
Helpful hint: Length of credit history is very important to your credit score. Never close your longest held credit account.
Under the FACT ACT amendments to the Fair Credit Reporting Act, consumers are entitled to one free Personal Credit Report in a 12-month period. For more information, or to request your free annual report online, visit www.annualcreditreport.com.
Your FICO score can be obtained from www.myfico.com. They will assist with monitoring your FICO score and provide tips to improve it.
Helpful hint: Your credit report and your credit score are two separate things.
© 2012 WSVMA