Do you know the warning signs for carrying too much debt? If you’ve gotten off track with your credit card usage, or want to ensure your borrowing habits stay in good shape, here are some tips to help you manage your money wisely.
Calculating Your Score
Your credit or FICO score is comprised of five components: the amount of money you owe, your payment history, new credit you’ve applied for, length of credit history and your credit mix, which is the types of credit you have such as credit cards, auto or mortgage loans and student loans.
Warning Sign: Debt Level Rising
The amount you owe lenders makes up 30% of your score. Generally, experts suggest you spend no more than 36% on all your debts, including housing, car loans and other debts.
Revisit your budget and monitor your spending to cut costs. If you have good credit but consistently carry a balance, switch to a credit card offering a low interest rate to reduce what it costs to finance your debt. Another option might be a balance transfer from your existing card to one that offers a 0% APR for a set period such as 18 months. Just make sure you know what the costs may be, including if there’s a balance transfer fee, and what the interest rate will be when the transfer period ends.
Consider refinancing your auto, mortgage or student loans to reduce your monthly payments. If your credit score is lower than you’d like it to be, paying down a high balance—even if it’s not all paid off—will improve it the lower that balance goes.
Warning Sign: The Minimum Payment Trap
If you make minimum monthly payments, you are paying too much in interest charges, which can really hurt your finances. For example, if your card has an annual percentage rate (APR) of 15%, your average daily balance is $3,000 and if you’re only making minimum monthly payments of $60, you’ll pay between $400 and $450 in interest charges annually. That same amount could go toward funding emergency savings.
The Fix: Work toward paying your balance off each month. If you can’t, try to pay as much as you can over the minimum payment, such as 30% more, and be consistent about it. If you carry several credit cards, work toward paying down the card with the highest interest rate, and then pay at least the minimum on all the others. If you don’t have one, start an emergency fund. Make every effort to save at least $1,000 so you can use savings and not credit when the unexpected occurs.
Warning Sign: Making Late Payments
Your payment history makes up 35% of your credit score, so that’s why it’s critical to pay your credit cards and loans on time. If you make a late payment on your credit card, you’ll incur a late payment fee, ranging from $25 to $35 per instance. If your payment is at least 30 days past due, it will be reported to the credit bureaus. According to FICO data, a consumer with a credit score of 720 could see it drop to 580 or 590 for just one late payment.
The Fix: If you’re simply forgetful, set up automatic payments to your accounts so you never have a late payment again. If you’re struggling to make ends meet, consider getting expert financial guidance to help you figure out a debt management plan. SchoolsFirst FCU partners with BALANCE, a financial fitness program offering free tools and resources, including confidential counseling and coaching. Visit schoolsfirstfcu.balancepro.org for more information.
Warning Sign: Taking Cash Advances
To get a cash advance, all you need is an ATM, your credit card and a PIN to withdraw cash, but you’ll pay dearly for this simple transaction. Depending on the lender, you’ll pay a percentage of the amount you borrow which can be as much as 5% or a flat fee. In addition, the APR for a cash advance is usually much higher than the APR for your credit card, often higher than 24%.
The Fix: A better option may be a personal loan from your financial institution. In most cases, the interest rate will be much lower than the interest rate for a cash advance.
We’re Here to Help
At SchoolsFirst FCU you’re more than just a credit score or checking account balance. We are committed to providing you personalized advice and competitive rates on our financial products. If you need help managing your loan payments or credit cards, give us a call or visit us at your local branch. We can help you find the right solutions for your situation.
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Extra Credit provides general information to help improve our Member’s financial lives. Every situation is different, so please contact us for guidance on your specific needs. The advice provided in Extra Credit is not intended to serve as a substitute for speaking to a loan representative, financial advisor, or BALANCE counselor who can help tailor a solution for you.
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