During Money Smart Week, it may be helpful to know that debt is a fact of life for everyone. Debt is not necessarily bad. The key is understanding how to use and manage personal debt so that it works in one’s favor. Some debts are unavoidable, such as auto loans or mortgages, however many individuals are unaware that interest rates are based on the strength or weakness of their credit score.
Armed with the right resources, cities can help their citizens learn how to reduce and reorganize their debt, save money on interest payments and implement better credit and money-management skills. For many people, better organization and understanding are enough to help reform credit and spending habits. City officials can encourage people to take the following steps to start improving debt-management behaviors.
Step 1: Get the Full Picture
If your community wants to be debt-free, everyone needs to know where they stand before they get started. Everyone is legally entitled to a free copy of their annual credit report from each of the three major credit reporting agencies: Equifax, Experian and TransUnion.
Start with a credit report in hand, because it’s important to check them carefully for accuracy and to identify all debts. Next, get a free credit score to evaluate if it’s possible to apply for lower interest rates or a debt consolidation loan. Having an accurate and updated score helps people with debt understand what interest rates they qualify for, and find out if it’s a good time to apply for a loan.
Finally, check the National Student Data System to gather all student loan information.
Step 2: Understand How Debt Impacts Credit
Credit reports are not the same thing as credit scores. A credit score is calculated using information from credit reports – which includes data from credit accounts, how often credit applications have been filled out, debt collection accounts, public records, and other information. The FICO score is most widely used, and numbers range from 300-850. On the FICO scale, anything over 740 is considered excellent. Scores below 650 will result in higher rates on loans and credit cards; even 20 points or so may make a big difference in getting favorable rates for financing.
Regarding credit scores, the amount of debt owed is second in importance only to whether an individual pays their bills on time. Credit utilization — how much debt is carried versus how much credit has been extended collectively and on individual credit cards — accounts for about 30 percent of most major credit scores.
Step 3: Start Improving Credit
After collecting all relevant debt information, it’s time to implement a strategy that will allow for the reduction and elimination of debt burdens. This helpful online tool gives users a personalized approach and the tools to begin calculating a plan to balance debt and expenses. Writing down monthly income, after taxes, rent/mortgage payments and other monthly expenses will show how much is left to pay off debts.
If this amount is too small, consider ways to reduce spending. The more money that can be put towards reducing debts each month, the faster total personal debt can be eliminated. A manageable payment plan allocates most of the available budget funds for debt payments towards high interest credit cards first, while maintaining minimum payments on all other accounts.
Credit problems don’t have to be permanent; as time passes and good payment patterns are represented on an individual’s credit report, credit scores can be rebuilt. Using and managing credit is first about maintaining an awareness of one’s credit history - and fixing potential errors - then keeping up with all payments in as consistent and timely a manner as possible.
Additional Resources
Access and share a Credit Card Payoff Calculator