How to Make Good Financial Decisions
By Mel Jensen
Many Americans do not make good financial decisions and find themselves with poor credit scores. They don't know when they made these bad choices but often feel that they are wrong. These poor credit scores often reflect the misunderstanding of how credit works.
Good financial decisions can be made if you know how credit works. Here are some things to help you understand how your credit scores are figured and how to make good financial decisions.
1. Don't get too far in debt - you must know how much debt you have in relationship to how much income you have. You should never have more credit card debt then you have in three months income. If you make $2500 a month then you should not have more than $7500 in credit card debt. If you have a huge mortgage and are making multiple car payments you will want to have less than that in credit card debt. Keeping your credit card debt below 30% of your credit card available balance is best. By having no debt is even better than any debt. Your grandparents often lived with the adage "if you can't pay cash, you can't afford it". This is good advice for building good financial decisions.
2. If you carry any credit card debt be sure that you are making your payments on time and in full. It is better to pay off anything you charged to your credit card in full then it is to carry the balance. Credit card interest rates range from 6% to over 20% so you will be paying dearly for anything you carry a balance on. If you buy anything on your credit card that is considered daily living expenses be sure you pay those off in full at the end of the month. Things like groceries, automobile gasoline and dinners out are just a few of these examples. If you buy groceries and then carry that as a balance you may be paying for those groceries for several years. This is a bad financial decision and should never be done.
3. If you have a mortgage and automobile loans make sure that you always pay these on time. Your credit scores will drop dramatically if you fail to pay them on time. If you need to cut your payments down due to unexpected or life changing events review your credit cards first. You can save some money by making the minimum payment on your credit cards for a few months until your financial problems have been resolved. It is better to pay the interest than it is to not make that payment. Your credit score can drop by 100 points for each late payment. If you fail to make a mortgage or automobile loan payment on time it will become more difficult to obtain those types of loans.
4. Reducing your debt - setup a good budget, one that you can live on, that will help you reduce your debt. Setup a good budget start by keeping a money diary. This diary should be kept daily and show every single expense no matter how small. If you bought a stamp write it down, if you bought a cup of coffee write it down and so on. This diary will show you where your money is going. Once you have this diary you will know where your money is going and where you can save. All of the money you save should go to reducing your debt or building an emergency fund. I suggest reducing your debt first, then building that emergency fund. An emergency fund consists of your monthly expenses times 3 to 6 months. By having 3 to 6 months worth of living expenses you can withstand a major life changing event. A life-changing event can consist of a job loss, a major medical problem and even unforeseen problems such as hurricanes or tornadoes.
These simple things will help you make good financial decisions and keep your credit score higher. Having good credit so important today to the economy and what many lenders use to determine whether you're a good risk or a bad risk. Take the time to monitor your credit report and dispute anything that is inaccurate. The Fair Credit Reporting Act gives you the right to dispute anything that is inaccurate, misleading or simply not yours. Once your report is accurate monitor it every six months and at least once a year and keep it accurate. Don't be afraid to hire a legitimate credit repair company if you don't know how or have the time to dispute the inaccurate information on your credit report.
About the Author:
Mel Jensen is a retired Customer Service Manager with Ovation Credit Services. He has written many articles regarding Credit Repair.
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