Here we are at the end of another year. How are your finances shaping up?
As with every year, this last month can sometimes be a tough one for your wallet. Somewhere between all the holiday celebrations and family gift exchanges, you end up with a lot less money in your billfold.
Sure, in exchange for all that overspending during the holidays, you may curate a perfect celebration with close family. But you may also increase the chances of gaining holiday debt and negative marks against your credit history.
The start of a brand new year may be your chance to put this behind you, but it’s not always easy improving your finances.
To help you ring in the new year, check in with our pointers below. Here you’ll find some of the most common, yet useful financial goals and tips on how to achieve them.
1. Paying off Holiday Debt
In your quest to get all your friends and family the best gift possible, you might feel like you need to go into debt to keep up with your holiday shopping. You can then just keep up with your minimum payments until it’s paid off. No harm, nor foul, right?
The truth is, relying on making only the minimum payment means you’re carrying over a balance, which is an expensive habit to have. Generally, every time you carry over a balance, you accrue more interest and/or other fees.
In other words, the longer it takes you to pay off your holiday debt, the more money you may end up paying — even if you don’t charge another purchase to the account.
How to Deal with Holiday Debt
Paying off holiday debt as fast you can is a fantastic goal for 2021. How you tackle your payments depends on your unique needs and capabilities.
The answer depends on what works best for your finances.
That being said, there are generally two popular methods (with seasonally appropriate names) to pay off any kind of debt — not just the kind that comes with sleigh bells.
Grab your beanie and snowsuit, for these techniques may help you freeze out debt!
1. The Snowball Method
This first method ranks your debt in order of smallest to largest balance with your focus going to the debt with the smallest balance. Any extra cash in your budget goes towards paying this off first while making the minimum payments on everything else.
Once you pay off the smallest debt, you’ll roll the money you were putting towards that first account into the next smallest debt.
Although you may be making smaller payments at first, your payments will grow in size every time you eliminate an account from your debts. Eventually, you’ll gain enough momentum to make large payments against your biggest debt.
Imagine these payments like a snowball rolling down a hill. At first, it may be small, but as it picks up speed, it also packs on more snow. By the time it reaches the bottom, look out; it’s a force to be reckoned with, just like your commitment to paying off holiday debt.
2. The Avalanche Method
For this next technique, you’ll want to shake up your ranking from before. Instead of worrying about balance sizes, you’ll look to the interest rates and rank them from highest to lowest.
Again, you’ll make sure you have enough cash to cover the minimum payments of every debt. But this time, you’ll push any extra cash towards the debt that accrues the highest interest.
Once you pay off your first debt, you’ll use the cash that you were putting towards that debt to pay off the one with the next highest interest rate. And so on until you’re done paying off holiday debt.
While this second method may take longer to yield results, it does intend to wipe out debt in a way that saves you money. By first paying off loans that stand to earn the most interest, you may ultimately pay less in these fees.
2. Managing Your Credit History
Long after you un-deck the halls, pack away the decorations, and drag the tree out of the house, there may be one more gift left to unwrap. It arrives with your next credit check, reporting if you have or haven’t done some damage to your credit history.
Like a lump of coal at the bottom of your stocking, if you have bad credit entries, they can dampen your spirits. And, unlike most other presents left under the tree, it’s not something you can return with a gift receipt.
For better or for worse, your finances have an impact on your credit score and report at large. But the number as it is now may not stick around forever.
Your credit score is a constantly evolving figure that changes depending on how you manage your finances. Good credit habits, combined with enough time to see bad credit entries slough off your file, may have an impact your score[1].
No matter what your credit score is, managing your credit history is a great New Year’s resolution. This number can affect the chances of your request getting approved for a loan or a line of credit in the future.
The higher a credit score is, the more likely a financial institution may offer you a loan or a line of credit at lower rates. As your score decreases, however, you may have to compromise on these rates if your request gets approved.
What is a Perfect Credit Score?
If you’re competitive, your aim may not be just impacting your credit score by a little. You may have your sights set on the best score possible.
According to the FICO credit scoring model, your score may fall anywhere between 300 and 850, which makes 850 a perfect credit score.
With this number in your file, you may be able to be approved for a variety of financial products, often at relatively low rates.
Do you Need a Perfect Credit Score to Borrow Money?
Simply put, no. People of all sorts of credit backgrounds apply for personal loans and line of credit loans every day and some may even get approved.
So what does a less-than-perfect credit score mean? It depends on how close you get to 300 on that credit scoring model range.
As you near 300, your selection of personal loans and lines of credit may dwindle. You may only have the option for a loan or line of credit for bad credit.
They may also have higher rates than the products offered to those with perfect or close to perfect scores.
Because they may impact what your loan or line of credit costs, you must always get more information about the cost of credit and other fees you’re expected to pay. This helps you determine if a financial product is affordable.
How to Build Credit History
So now you know the perks of a higher score, your next step is learning how credit scores work. Once you understand how your credit score is calculated and what might impact your history, you can make informed decisions about your finances.
Here are some of the ways you may make impactful contributions to your file:
- Pay your bills on time, every time
- Don’t max out a line of credit or a credit card
- Make more than the minimum payment — try to pay off as much of your balance as possible
- Use a line of credit for unexpected emergency expenses only
- Tweak your budget so you don’t have to rely on credit for everyday expenses
- Avoid applying for a new loan or line of credit if you don’t have to
- Check your credit report often for errors, inaccuracies, or fraud
- Read the specific FAQs about online line of credit options and any other product you may use
Last but not least, be patient. At the start of this goal, you may be obsessed with finding the fastest way to impact your credit. But the fact is, there may be no quick fix.
Generally, bad instances of credit can take years to drop off your report. Anything from a delinquent debt to a car repossession may have an affect on your score until it does[2].
Until then, adding impactful instances of credit is your best bet. Building credit history may take longer than you expect, but it is possible with the right attitude and commitment to good money management habits.
3. Building up Your Emergency Fund
Without a rainy day fund, your finances are in a precarious position. How would you take on an unexpected emergency expense?
When you learn how it works, a line of credit may help you cover short-term emergency costs like medical expenses or household repairs. But long-term issues like a health scare or a job loss may pose a considerable challenge.
Creating a cash buffer of six months or more may help you weather these substantial financial emergencies with greater confidence.
But let’s be honest — you may feel anything but confident at the beginning of this goal. Building an emergency fund of six months of expenses or more may be daunting.
If you’re feeling overwhelmed by this admittedly monumental goal, try focusing on the smaller steps you’ll need to take in order to achieve it.
Check in with your budget to slash unnecessary expenses and free up the money you need for your rainy day. Then set up automatic payments for your essential recurring bills to stop you from accidentally spending this cash on other things.
Like some wine and cheese, your savings get better with age. Even if you can only start with just $20, this $20 will grow with every additional deposit you make.
Once your stockpile grows, think about switching to a high-yield savings account so you can earn more interest on your savings. Just remember you may need to access these funds at a moment’s notice, so don’t lock into any investments that may punish you for making withdrawals.
Follow a Budget
Whether you plan to protect your credit history or pay off debt, committing to any of these New Year’s resolutions will be easier with a budget.
This financial tool helps you see where your money goes each month, giving you a chance to spot any problematic spending habits that may prevent you from achieving your goals.
Another word for a budget is a spending plan. In other words, it’s how you intend to spend your money.
Generally, you’ll want to figure out how much money you need to cover your essential bills. Housing costs, utilities, food — these comprise some of the necessities you have to pay each month. Even line of credit payments and transportation costs may belong on this list.
Once you have a good idea of what you need to run your household, it’s time to figure out how you spend any of the potential leftovers.
If part of your paycheck remains after covering the essentials, set aside some of it towards your emergency fund. You should also consider using some of it for long-term savings that may help you buy a new car or prepare you for retirement.
According to the 50-30-20 budget method, you should split roughly 20 percent of your income between these savings accounts and debt repayment. Another 30 percent goes to fun things, like drop-in dance lessons or video games, while the main chunk of your paycheck goes towards needs.
If your percentages don’t line up, take some time to review your needs and wants.
Is everything under your essentials a true need, or could you live without some of them? Ask the same question of your wants — could you manage to slash takeout or rideshares and still live life as normal?
It may be easier finding money in your wants than your needs. It’s simply a matter of saying goodbye to these fun splurges. But that doesn’t mean you’re stuck paying exorbitant prices for all your needs.
If you think you’re paying too much in housing costs, utilities, or some other essentials, do some research. What would it take for you to be able to move to a more affordable house or lock into cheaper insurance premiums?
While sacrificing some wants may add a quick boost to your savings, limiting what you spend on these big-ticket expenses may have a more profound impact on your finances.
Get Ahead of Your New Year’s Resolutions
In the hustle and bustle of the season, it’s all too easy to ignore what the festivities do to your finances. But in the cold, harsh light of January, there’s no hiding what overspending during the holidays can do.
Luckily, it’s also the perfect lighting to shine a spotlight on the positive changes you need to make. A new year represents a clean slate for your finances; it’s up to you how you want to fill it.
Good luck and have a Happy New Year!
Disclaimer: This article provides general information only and does not constitute financial, legal or other professional advice. For full details, see CreditFresh’s Terms of Use.
[1] https://www.credit.com/credit-repair/how-long-do-things-stay-on-your-credit-report/
[2] https://www.thebalance.com/what-it-means-to-have-a-repossession-on-your-credit-960751
