The recession had many far-reaching effects for consumers of all financial backgrounds, but one that was prevalent more or less across the board was that the downturn led many to reassess the ways in which they handled many aspects of their credit. While that's a great first step to getting one's finances back under control, there are other aspects you should try to address as well to avoid any backsliding.
Many consumers have learned the hard way that carrying large amounts of credit card debt can lead to major financial troubles that can be difficult to remediate even over the course of a year or more. As such, many have made significant efforts to slash those balances to more reasonable levels, or even altogether. But the mistake many people may make in getting to that point is that they're so focused on cutting their obligations on credit cards or other types of financing that they ignore other crucial parts of a healthy overall financial picture. That includes building up a sizable emergency fund that can help them out of any potential jams that they could run into in the event of unforeseen circumstances.
The good and bad of slashing credit card debt quickly
Obviously, the idea behind getting out from under your outstanding credit card balances is a very good one: The less you owe, the more flexible you may be in dealing with your many various financial needs in any given month, and also, at the same time, the better your credit scores will be.
Having fewer debts comes with those benefits because smaller balances necessarily mean smaller monthly minimum payments. That, in turn, gives you the opportunity to devote money to where it needs to go in any given month.
And while at that point, larger payments will actually cut your debts more considerably by paying a sum greater than the minimum every week, it might also present you with an opportunity to build your savings with some leftover dollars you might have otherwise devoted to that debt reduction.
The reason it's wise to build up a solid cash reserve should be fairly obvious: If you suddenly have a need for emergency car repairs, or to pay another type of bill you couldn't have budgeted for ahead of time, having that added financial cushion to cover you could be a massive help. That would mean that you don't have to rely on money you might need in your everyday life — for instance, you shouldn't have to choose between that emergency cost and paying all your other bills — and, more importantly, you won't have to turn to your credit card and, in one fell swoop, undo the months or even years of work you did to get your debts to a manageable level.
In addition to immediately having your debt picture change dramatically and for the worse, you would also likely do a lot of damage to your now-healthy credit scores. In fact, a full 30 percent of your total rating is made up only of how much you owe when viewed as a percentage of your total credit limits.
Let's say, for example, that you have successfully cut your debts across your four credit cards to just $1,500 through several months of careful repayments, and your cards have a total limit of $10,000. That's well within the 30 percent threshold that ensures this portion of your score it totally maxed out. However, if you suddenly have to add $2,500 in credit card debt for an emergency medical debt at one time, that would boost your debt to $4,000, or 40 percent of your limits, and your credit score would fall as a consequence.
Don't get discouraged
While it may not be realistic to expect that you'd simply have a few thousand dollars worth of savings built up after just a few months of effort, any amount you would have at that time would cut into your debt burden and make it easier to handle in all aspects going forward.
Though it can be tough to feel like you're making significant headway when it comes to saving, it's important to keep in mind that just like cutting into debt, building up good-sized cash reserves is a gradual process. As such, any progress you make toward a goal — and it's often wise to have one in mind when you begin — can be appreciated.
Of course, another very important aspect of making sure you're doing all you can to protect your credit and overall finances is taking the time to order copies of your credit reports regularly. By doing so, you may be able to determine whether there are any unfair markings that could be having a negative impact on your standing. If so, you might want to contact a credit repair law firm, as that may help resolve the issues fairly quickly.