Your Financial Health
Being financially healthy is a struggle for a lot of people, and understanding finance, money, and credit is difficult in and of itself. While navigating financial waters can be challenging, it isn’t beyond anyone’s capabilities. Below you’ll find key aspects to understanding your financial health and how to improve your financial situation.
Understanding Financial Health
There are several guidelines you can use to help understand the state of your financial health. Before we discuss the key aspects of credit, it’s important to know where you are financially by asking yourself some key questions:
- What is your net worth and is it positive or negative?
- Do you have an emergency fund for an unexpected situation?
- Do you have enough insurance coverage?
- Are you saving for retirement and do you have retirement amount goals you’re on track to meet?
- Do you have the things you need?
- What percent of any debt you have would you consider high interest?
By answering these questions, you’ll have a clearer idea of your financial circumstances and where you can improve. Remember that “financial health” can be measured in many ways and it’s just what you have in your saving account. Also, financial health is fluid. You can be great one year and your financial situation poor the next. That’s why the questions go beyond your liquid assets.
Credit is another part of your financial health that many have trouble navigating. The previous section briefly covered that financial health involves more than money in the bank, which is why we will break do the basics of credit before moving into tips on how to improve your financial health.
Why is credit important to your financial health? It’s a way for banks and companies to measure financial health of individuals who want a loan or open a line of credit, indicating their ability to handle either. Think of a credit score as a demonstration of handling debt.
These are popular questions people ask and great information whether you're in a good financial situation or working to improve your financial health scores.
What is a Good Credit Score?
Having a good credit score provides many advantages and positively influences the already positive financial state you have. With a good credit score you’re able to:
- get lower interest rates
- a better chance at credit card and loan approval
- higher credit limits
- better approval chances at renting homes or apartments
- better car insurance rates
- fewer instances of security deposits on utilities and cell phones
To gain these benefits, you’ll want a credit score that is at a minimum of 670. From there, anything above 750 is considered very good and above 800 is exceptional credit.
What is an Average Credit Score?
Having an average credit score still harms your financial circumstance and can make some things more difficult, but it isn’t as desperate as having a bad score. Like the lists above, having an average credit score can impact:
- chances for credit card and loan approval, lowers the chances
- less favorable interest terms when compared to those with good or better credit
- fewer credit card choices
The good news with having an average credit score is that you have more wiggle room to improve your financial health.
What is a Bad Credit Score?
A bad credit score needs to be avoided at all costs as it can impede more than your long-term financial goals. Having poor credit can keep you at the bottom of the financial wellness wheel and make it more difficult to get out of debt or get approved for anything. The specific impacts of a bad credit score include:
- paying a fee or deposit to get a credit card
- not being approved for any credit card
- more difficult to find housing
- Can harm a job hunt
- paying a deposit to have utilities
- higher insurance costs
- difficulty getting a loan
A poor credit score means having a credit score of 570 or less. If you’re in danger of falling within those numbers, the negative impacts listed above are right around the corner.
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Understanding the Credit Bureaus
There are three main consumer credit bureaus: Equifax, Experian, and TransUnion. Each collects and stores your credit information given to them by lenders and other companies, which they then use to generate your credit reports, which in turn creates your credit score.
Not all lenders and companies report to all three, which is why your credit score may be a little different from bureau to bureau, but all three collect several important pieces of information from who reports to them:
- Credit account information: account balances, payment history, credit limit, and loans. These loans include student debt, mortgages, auto loans, and credit card debt.
- Bankruptcy: If and when you filed for bankruptcy, including what chapter.
- Collections: any past-due payments information is sent to a credit bureau.
- Inquiries: There are two types that are noted on your credit report, a hard inquiry and a soft inquiry. Hard inquiries are when an individual or company is allowed to check your credit reports, which can temporarily lower your score. A low inquiry is when you check your credit report, but that won’t negatively impact your score.
The credit bureau would also be the one contacted to dispute inaccurate information on your reports, as well as the source of the information. To learn more about how to remove inaccurate lines from your credit report, we strongly encourage you to visit our Credit Repair page!
How to Improve your Financial Health
To help regain or improve your financial health, there are several tried and true strategies that can help make a dent in debt while stabilizing your money. Here are some things you can begin to do before or while you tackle credit repair:
The idea of budgeting is simple enough but more difficult to put into practice for a lot of people. You should begin with a monthly budget where you collect your financial statements and receipts, then sort through them and make a list of income vs spending. Having categories can help, like essential (bills/gas/food) and nonessential (clothes/eating out/entertainment).
There are numerous methods to develop a monthly budget once sorting out your income vs. essential spending and nonessential spending. A popular method is the 50/30/20 budget. The 50% is post-tax income essential spending, 30% to discretionary spending, and 20% post-tax income goes to savings and investment.
Pay off Debt
Paying off debt becomes easier once you know how much money you’re spending vs how much you’re coming in. Think of it as financial organization. This financial health tip also feeds into credit repair as paying off any credit or high-interest consumer loans will help raise your credit score.
There are two primary methods to pay off debt:
- The Snowball Method: you start paying off the smallest debts first and then put the extra cash, once that debt is paid off, into the larger ones. The amount you’re putting into lowering the debt growing and growing till it’s all paid off.
- The Avalance Method: Pay the minimum on the highest interest loan first and once that loan is paid off, focus on the balance with the next highest interest rate.
Overspending is easy, it’s always a few dollars here or there. Problem is that it adds up quickly and usually without being noticed. One way to stop overspending is to use features on your debit or bank account that prevents you from spending so much in a time period or creating a self-imposed holding period. Waiting 24-hours before clicking “purchase” online often leads to not buying something. Overspending is usually due to impulse, so better to let it subside.
Invest in an Emergency Fund
The lack of having emergency money usually forces people to dip into their retirement or other long-term savings or overuse their credit cards. You should take a specific percentage of every paycheck and put it towards an emergency fund, one that is roughly three to six months of living expenses in case of, well, emergency.
Start with a Credit Score
The first step in knowing your financial health is knowing your credit score. We at n2cred offer a free online credit evaluation and credit improvement plan, including a free credit score.
Our goal is simple: improve the financial health of individuals.
Offering a free way to start on that road is just the beginning of what we do.
Credit repair can be difficult to navigate
If you’re unsure about consumer and credit laws, check out Nevly if you need help repairing your credit score. They provide an app that can help you with credit repairing and even have rental payment reporting tools to help the credit bureaus take note of payments not usually listed.
Sign up today and get Nevly.