January\’s theme revolves around debt. It\’s not something that most people are super excited to jump right into, but it\’s also the elephant in the room. I started this series focusing on the importance of building a Plan to Spend because I wanted you to be intentional about building your budget. Using that framework, you can better understand how much of your spending goes to pay down debt and pay for things on which you have loans.
In future blogs, we\’re going to discuss student loans, household debt, a home equity line of credit, auto loans, and mortgages, but for now, we\’re going to focus on unsecured debt.
Most of us are accustomed to having some form of debt in our lives.
The data is shocking: the percentage of the population in debt closely mirrors the percentage who cannot afford to have an emergency of $1,000 or more without relying on credit. The numbers are sobering: almost 80% of the population has debt of some kind. That stat would insinuate that this topic is at the forefront of the minds of 8 out of 10 people.
After leaving the holiday season and entering the first month of a new year, people are trying to figure out how to get in shape, slim down, or maybe even bulk up; how to get their finances in order; how to muster up the courage to finally ask out that special person. They\’re trying to look at ways to revamp their lives through resolutions and goals. Debt is one of those issues that should be resolved.
An article recently written by CNBC pulled data from an Experian poll that found that 8 out of 10 people made financial resolutions around credit and debt.
People are concerned about their credit and debt and about how to manage it well.
The credit industry is a tricky one. Almost everyone has and monitors, to some extent, their credit score, at least when they go to get a new loan. But to secure that initial loan, oftentimes, you have to have credit to get it. And to build credit and improve your credit score, you have to show that you\’re responsible with debt by managing loans and adding credit lines.
It\’s a vicious cycle. When credit agencies are looking at you in particular, they\’re analyzing your creditworthiness. They\’re trying to assess the likelihood, from a statistical standpoint, of you repaying the debt that you\’re taking out. Institutions evaluate your creditworthiness by considering five key components. These components churn out a specific credit score that tells the institution whether you are qualified to purchase (or to be extended credit to purchase) whatever you\’re trying to buy.
The five components of credit are as follows:
the length of your credit history, the number of new accounts and the age of those accounts, the history of your accounts and the duration of time you\’ve had them, the payment history of these different lines of credit, and finally, the amount of utilization. In other words, the amount of credit extended to you that you\’ve utilized. Is it just me, or is this system set up to keep us in debt?
The current credit arrangement focuses on managing debt well versus managing money well. Yes—your credit score may be important. It may be necessary for you to qualify for a home or a certain position you\’re trying to get.
But remember: having a good credit score does not automatically mean you\’ve been managing your money well.
My call to action today is to use your bank, your credit card, or a third party to pull your credit score and to know where you stand. You want to be able to gauge your debt accurately. The information provided by the credit bureaus should give you an accurate appraisal of what is being reported on your behalf regarding your debt.
