Credit, Credit, Credit: Too Much or Not Enough?

Americans are spending again, but unfortunately a great deal of that spending is going right on a credit card. Americans racked up $21.9 Billion in credit card debt in the 3rd quarter of 2016 and added about $80 Billion in personal debt. Sound scary, it is! Americans owe about $927 Billion in credit card debt, which is quickly approaching pre-recession levels. This can’t be a good thing folks. The average American is carrying $8,000 in credit card debt, if this is you, stop!

Credit itself is not evil, just as money isn’t evil, or spending isn’t evil – it’s how you do it that makes the difference. Having good credit is important when you go to purchase a home or car, so managing your credit is critical to your future. I was counseling someone recently who was denied financing for a home because their credit was poor; they had behaved poorly in the past and it now it was costing them dearly.

Paying attention: most Americans have no idea where their money goes. They get their paycheck, they pay a couple of bills, and they’re broke again; rinse, repeat. If they have to buy clothes for work or any large purchase, it goes on the credit card, which of course further increases your monthly bills. If you want to get your spending under control, you have to know where your money is going.

Knowing where you stand: first check out Credit Karma, it’s a free site and you can see what your FICA score is and even some free insight on what’s negatively and positively affecting it. Next, get yourself a copy of Quicken or MS Money (may already be on your laptop or PC) and start tracking every dime that goes through your checking account. After the first couple of months you will be amazed on how much you are spending and where. A friend of ours did this recently and realized they were actually spending MORE than was coming in – they knew money was tight, but had no idea how much trouble they were actually in. Next, set yourself up a budget. I know, everyone hates a budget, and most who have tried to follow one usually end up abandoning it. A budget is not a scary concept, is just that most who try to use one are unrealistic about their spending – that’s where the Quicken piece comes in. Understand what you’re spending where, analyze where you can make reasonable cuts, and use your budget form to plan said cuts. Sounds simple right, and it is simple, but simple doesn’t equate to easy.  

Printable Budget Form

Bad credit/Good credit: Good credit can help you buy a house or get better a rate on that new car while bad credit can cost you dearly. Good credit can get you a rate as low as 0% in some cases while bad credit can get you a rate as high as 49% in some States. Fixing bad credit is pretty simple, but can be very time consuming, and again, you have to pay attention. If you have credit cards already you need the balance of each to be less than 40% of the available line of credit, and showing ‘paid as agreed.” If you have any loans in default, also known as charge-offs, you will need to track them down and make arrangements to repay the loan. If you don’t have any credit cards or other revolving accounts you will need to establish some as your FICA score is really based on how well you make your debt payment not how much money you have in the bank. Again, Credit Karma can help here as they will suggest credit cards that you have a good chance of getting, even if they are a ‘secured card.’ Note: I recently paid off a car loan and it actually dropped my credit score by 20 points because I now had fewer revolving accounts being ‘paid as agreed.’

A cautionary tale: some people come to the realization that they are so deep in debt they can simply never dig themselves out and they throw up their hands and declare bankruptcy. OK, if you have to then you have to, but don’t take that as license to going back to your old ways of spend, borrow, spend. I have a friend who reached this point a few years back, drowning in debt with now way out he filed bankruptcy. Note: you can only do this once every 7 years and the credit card companies know this. Once you complete the filing, your mailbox will be loaded with offers from every credit card company under the sun. So here’s a prime example of what not to do. Do not dig yourself right back into the same hole you just got out of. Yes, you probably see this coming; the ink was barely dry on his bankruptcy when his wife opened up a couple of new credit cards. If that wasn’t bad enough, they packed up their kids and went to Disneyland. Wow.

Being normal is being broke; look around and ask yourself if this is where you want to be 5 years from now. Life is about more than just working to buy things you don’t need, spending money you don’t have just to appear normal – the heck with normal! Hope you found this helpful.

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