The New Year is days away, and it’s time to look back and consider the past year. Are your finances stable?What about your credit? Do you have goals for 2016? Consider the following tips as you answer these questions. What you learn will prepare you for a fresh start.
- Know “the number.” Financial health is impossible without the facts, and credit health is no different. Many consumers avoid tallying their total debts—also known as “the number”—in response to denial and fear. While it may be tempting to limit your knowledge to minimum payments, accruing interest and high debt utilization equal overwhelming burdens and credit damage. Summon the courage to learn your number before 2016.
- Pull your credit reports. The story of creditworthiness exists in your credit reports. Compiled by the three major credit bureaus—TransUnion, Experian and Equifax—your credit reports serve as a report card for how you spend, manage debt, borrow, rely on credit and even pay your taxes. An accurate credit report provides a fair glimpse into your personality. Unfortunately, one in five consumers has some sort of error on their credit reports. In addition to causing unnecessary damage, misreporting can lead to financial consequences such as higher interest rates, insurance premiums and even loan denial. Learn where you stand by ordering free annual copies from the bureaus. Highlight any inaccurate or outdated information for dispute or validation. A proactive stance is essential.
- Eliminate risk. Reporting mistakes aren’t the only source of credit damage. As a score of 300 to 850, credit is a representation of risk: the higher the number, the lower the risk and vice-versa. An inflated level of risk usually means bad credit, and it’s important to identify and eliminate these factors. Begin by assessing:
- Cosigned loans. Vouching for another person’s debt is a selfless act, but it’s also dangerous. If your friend fails to pay, you (and your credit) are responsible for the remaining balance. Consider this fact as you review debt. If a cosigned loan has been dragging your credit down, it’s time for a heart-to-heart with the primary borrower.
- Emergency savings. Suppose an injury leaves you unable to work for three months. Your employer doesn’t provide disability benefits. How would your finances fare? In this case, the average person is forced to rely on credit for necessary expenses, leading to maxed out credit cards and overall credit damage. Protect yourself by building an emergency savings account. Aim for three to six months of income.
- Cut spending (but start small). In addition to emergency income, monthly savings are essential to credit health. Start small by committing to a five percent reduction in 2016’s first quarter. Online tools like Mint.com provides helpful insight into how much you spend and how often. Click here to review some additional suggestions.
- Create a payoff plan. Existing debts may put a damper on 2016, but their influence shouldn’t be permanent. Creating a payoff plan for each account will help you take control in the New Year and focus on tangible goals. For example, suppose you have $8,700 in student loan debt. The interest rate is 4.5 percent and the minimum monthly payment is $24. In order to pay off the debt before 2017, you calculate the monthly interest accrued:
(Balance x interest rate)/365= Daily accrued interest
(8,700 x 0.045)/365= $1.07
Multiply the daily accrued interest by the number of days in each month to learn the monthly accrued interest. For example, December’s interest is $33.25.
Divide the principal balance by the number of months in the year to learn the desired payment:
Add the monthly payment to the monthly interest:
Even if you can’t afford an aggressive plan like this one, tackling the math is a start. Review your budget to determine how much you can afford and create a plan that works for you.
The bottom line: 2016 is full of possibilities, and it’s up to you to take advantage. Don’t wait to repair your credit and put your finances on a prosperous path.