Achieving financial wellness often starts with understanding the key components of your financial health, including debt and credit management.
Credit impacts many aspects of life — from getting approved for loans to securing a job or purchasing insurance.
By taking steps to monitor your credit report, build a strong credit score and manage debt wisely, you can create a stable foundation for long-term financial success.
Here’s what you need to know about credit reports, maintaining a good credit score and distinguishing between good and bad debt.
Know Your Credit Report
As we continue to work towards financial wellness, debt and credit management are important factors.
First, it’s important to know your credit standing because credit can make a big impact when you are looking for jobs, applying for loans and credit cards, attempting to buy or lease cars, purchasing homeowners and car insurance and more.
Examining your credit report is a good way to keep an eye on it.
Free weekly online credit reports are available at AnnualCreditReport.com which provides information from all three credit-reporting bureaus (Be sure to visit this official site for your free reports).
Key takeaways when checking your free credit report:
- Ensure the information shown is accurate
- Verify that credit information isn’t used without your knowledge – for example, a loan or credit card listed that you don’t recognize. Checking your report regularly can help you discover identity theft early.
- Don’t expect to see your credit score, as that’s not included with free credit reports (But remember, checking your own credit report or credit score won’t affect your score).
Building and Maintaining a Good Credit Score
A good credit score is foundational to financial wellness and can help you receive lower interest rates and better terms in some loan and credit card situations (Different lenders use different criteria, but a good credit score is a positive).
What is a good credit score and how do you improve it? According to Experian, a good credit score ranges between 670 to 739. Above 740 is considered very good and 800 and above is excellent.
What determines your credit score?
- Bill repayment
- Your % of credit usage (how much available credit you are using)
- Length of credit history
- Types of accounts (revolving credit such as a credit card vs. installment accounts like a loan), can show your ability to manage different types of credit
What helps your credit score?
- Paying your bills on time
- Keeping your credit usage low, not opening accounts you don’t need
- Establishing a credit history early (having a credit card that you pay off monthly)
- Living within your means by following a budget, taking on less debt
Though you can receive your credit report for free, you may need to pay to find out your credit score. If you pay for credit monitoring services, you may receive your credit score as part of the paid service.
Though you may be curious to find out your credit score, decide if you are willing to purchase this information.
Remember, your credit score is based on your credit history and if you know your credit history is good, there is a good indication that your score will be as well.
Good Debt vs. Bad Debt
Debt seems to be a topic less talked about – but often thought about, especially after the holidays when credit card bills arrive all too soon.
Though debt is rarely thought of as a good thing, there is a distinction between different types of debt.Throughout life, we may find ourselves in situations where debt seems necessary to achieve our goals, but the difference here is between what is necessary and what is not.
For example, a mortgage is typically considered good debt as it’s taken on to purchase an asset that is likely to appreciate.
Similarly with student loans or educational job training programs, if you obtain a degree or new skills, there is potential to improve your employment options and generate future income.
Bad debt is typically known as debt for depreciating assets such as personal expenses, or simply as expenses that do not provide potential future income. Technically, cars are a depreciating asset, however they are also a necessity for many.
The key here is to stay within the realm of what’s needed and not necessarily everything you want (if it’s not in your budget). If you find yourself relying on bad debt options, start by making a plan to pay these down.
Paying off debt like high interest credit card balances makes saving for the future possible. A goal to work towards is to use credit cards like a debit card – meaning you only spend with money you are able to pay now, not money you will pay later.
