Thanks to all the attendees of our webinar, My Money Story Series: Credit Karma Talks Finances, Credit and Debt, featuring Jennifer Micieli, from Credit Karma
If you missed the webinar, you can view the video playback on our Kabbage KamWebinars YouTube Channel and view the slides on our SlideShare. Both the slides and video are also embedded at the bottom of this article for you.
How’s Your Financial Health
There are many components of financial health. The following are three areas that can give a fairly comprehensive high-level summary:
- Financial Beliefs, Goals and Habits – Expectations, Motivations and Behavioral Tendencies
- Cash Flow – Comprised of Income and Expenses (Ex: Credit Card Interest)
- Net Worth – Assets and Liabilities (Ex: Auto Loan)
What’s the Difference Between Credit and Debt?
- When you use credit, you borrow money to pay for something now and pay it back later.
- This borrowed money becomes debt, which can accrue interest on the balance you owe.
A responsible use of credit allows you to be in the best position to borrow at the best possible circumstances. You get to this position by using debt and credit responsibly in an ongoing flow.
How Do You Define Your Credit Health?
You define this by looking at your credit reports vs. credit scores.
A credit report contains a detailed history of your credit and debt accounts. This report will usually come from the three major credit bureaus, such as Equifax, Experian and/or TransUnion
Credit scores consists of a three-digit number generally between 300-850, usually based on information from your credit report. You could have many credit scores. The most common scoring models are VantageScore and FICO.
Credit scores are possible to get for free, but generally you would have to pay.
Build Your Credit Health Through Responsible Credit Habits
Your credit health is a snapshot of how you’ve managed credit. Lenders use it to gauge how likely you are to repay a mortgage, loan or credit card. It can affect whether or not you’re approved for credit and what interest rates you might get.
Usually a pretty excellent credit score is about 720+, but it also would depend on the scoring model. A good score will help show that you’re on top of your credit.
My Money Story Series
Credit Karma has put together a video series called “My Money Story” where people share their personal experiences and challenges with managing finances, credit and debt.
Michael, 27, found out the hard way that it only takes one small mistake to end up with an account in collections.
He was 20 years old and was preparing to move back to Texas after finishing school. When he moved out of his house in Utah, he closed down all of his utilities accounts – or so he thought.
“I had an outstanding balance from a gas company and I didn’t realize it,” he says. It turned out that the gas company had sent the bill to the Utah address because Michael hadn’t provided his new forwarding address.
When he later pulled up his credit report, he spotted the collections account. The outstanding total? $42.
He quickly paid it. And since then, Michael has been super-aware of his credit and how his financial behavior can affect his credit history. In particular, he keeps a close eye on his credit utilization rate to ensure that he isn’t spending too much in relation to his credit limit.
“It keeps you in check – you don’t go too crazy on your spending. Credit is a privilege, not a right,” he says.
Michael also notes that now his finances are healthy and he has a good credit score, it’s much easier to talk to his fiancee and family about money issues.
Michael says, “When I started taking care of my finances, it got easier to talk about…if I was still at a lower score, it would be tough for me to (talk about) because it shows I wasn’t being very responsible.”
Even though Michael is mindful of his finances, it doesn’t stop him from having fun. His fiancee is a flight attendant so they both enjoy impulsively taking trips when they can.
“(She’ll say) ‘How many days off do you have? Four? Let’s go to Disney World,'” Michael says.
Check Your Reports Regularly For Accuracy
Michael shared a little about how something showed up on his credit report that he didn’t realize was there. You may wonder, how common is that story?
According to the Federal Trade Commission, 1 in 4 people found credit report errors that could affect their scores. Make sure you check your reports regularly for accuracy.
What’s considered an error?
Errors can include accounts you don’t own or inaccurate account information. Some common credit report errors include:
- A late payment that’s more than seven years old (should drop off around this time).
- A paid-off collections account that’s still showing as unpaid.
- A hard inquiry that you didn’t authorize. This could involve a request for a line of credit and your credit report is run to see what’s on your report, when in fact you didn’t authorize this.
- An account that isn’t yours.
Find an error? You can file a dispute.
…Or Derogatory Remarks
Which is what happened to Michael. He found a collections account.
What’s considered a derogatory mark?
- Bankruptcy – A legal declaration that you cannot repay some or all of your debts.
- Foreclosure – If you can’t make payments, the mortgage company can take possession of your property.
- Accounts in collections – Your unpaid debt was sold to a collections company.
- Tax Lien – If you don’t pay your taxes, a lien can be placed on your property.
- Civil Judgment – You are ordered to pay money as part of civil court proceedings.
What you can do if you have a derogatory mark
Work out a plan to manage your debt. Your plan might include:
- Paying off the debts.
- Focusing on keeping the rest of your credit in good shape and waiting for the derogatory mark to fall off (this generally takes 7-10 years, though).
Michael was able to find the derogatory mark in his credit report and was able to take the steps he needed to take to fix that and get his credit back on track.
Leah’s husband passed away when she was in her late thirties. He didn’t leave her in any debt, but most of their shared credit accounts were in his name. To get a fresh start, Leah decided to ask the bureaus to remove these open accounts from her credit history, so she called the credit bureaus and they updated her report. However, she quickly realized that this was a mistake. Doing so greatly decreased her score, Leah says.
“(Before), I had all the resources – but life can take a turn. It made me wake up,” she says. Until then, she hadn’t truly understood that credit can affect huge life milestones such as getting a job or buying a home – or even something more intangible like your self-esteem.
More painful lessons followed – her car insurance premium doubled now that her score had dropped and one boyfriend broke up with her because she had no credit score and a lower earning potential than he did. Her advice on that one? “Don’t date dumb dudes,” she jokes.
To rebuild her credit history, Leah got a secured credit card. Every time she made a purchase on it, even if it was just $20, she would immediately pay it off. In addition, she began to pay more attention to her credit report. Over time, she saw improvements in her credit score.
Now, at 45, Leah’s in a much better place, both financially and emotionally. “It’s just a learning lesson. Things are speed bumps, not stop signs. … Having everything and losing everything – the most important part about it is being able to come back from the bottom,” she says. As for her credit? “I want to be at an 800 credit score – that’s my goal.”
She also recommends taking the time to learn about credit and getting over the fear of asking people for help or advice. She says, “Study, read, especially if there’s something about your credit that you don’t know.”
Build Your Credit Health Through Responsible Credit Habits
Leah talked about building her credit through healthy credit habits. Here are some habits Credit Karma recommends:
- Try to use less than 30% of your available credit, and try to pay off the balance each month.
- Try to make payments on time.
- Consider having different types of accounts.
- Aim for a long credit history.
- Try to minimize derogatory marks, like collections or bankruptcy.
- If possible, don’t apply for a lot of credit. (Usually, it adds a hard inquiry to your report).
#MyMoneyStory: John & David
Money trouble can strike anyone – even people who work in finance.
“We were professionals in the financial services industry, but we were financial messes,” David says ruefully.
A year and a half after John and David started dating, they noticed that their family, friends and peers were buying houses and cars – something they “couldn’t fathom doing.” They decided to take a hard look at their finances and discovered that they had $51,000 of credit card debt.
“So while we were helping people with their finances, telling people where to invest and what to do with their money, we were a mess,” John says. John and David were living in a basement apartment and owned two “mediocre” cars. So how did they end up in so much debt?
In a nutshell: keeping up with the Joneses. To the outside eye, they were living a carefree financial life. But in reality, they were spending on luxuries they couldn’t truly afford. “We were going out to nice dinners. Happy hours on Friday and Saturday nights. Hanging out with all our friends. We had the right clothes. … That was the kind of lifestyle that put us in that spot,” David says.
“My jeans never cost less than $300. In hindsight, that was ridiculous,” John says.
During this period of high spending, David got laid off from his financial services company. He got a generous severance package, so he made a plan – take a couple of months off and enjoy the summer, pay off some debt, then get back to work.
Five months later, he had actually increased their debt and his severance money was all spent. The couple asked themselves, “Why are we spending our time doing things we shouldn’t be doing or spending our money on things that don’t really make us happy?” They realized that the things they were spending money on only brought temporary happiness. It was time to get serious.
“I figured out where I was spending every bit of my money and it was shocking. We were spending $500 a week at the grocery store, but we were also spending $600 or $700 going out to dinner and hanging out with friends,” David says. They both agreed: Let’s get out of debt.
They made a lot of changes; instead of spending $500 a week at the grocery store, they’d spend $150. They also stopped going to happy hours and clubs; instead, they would host friends at their place.
David says, “One of the things that John and I did early on is practice something we call NSE – ‘Not So Expensive.’ The idea there is to go out and find things you enjoy doing, but find them at a discounted cost.”
It took them 2.5 years to pay down their debt – they beat their target of three years – and now they’re both focused on building a financially secure future.
“Using debt as a way to finance your lifestyle — you’re really anchoring your future to the past,” David says. Once you start putting your money toward the future, “you’ll get rid of all that stress and you’re not anchored to something that doesn’t mean anything to you anymore.”
There Are Ways Out of Debt
First, ask yourself:
- What’s the lifestyle you want to have?
- What are you doing now?
- What can you do to get to where you want to be?
Next, get a sense of where you are financially.
- Look at how much you owe overall
- Review your budget
- Identify areas where you could make some changes
Finally, identify what you can do to help improve your situation.
- Make sure it’s a step you can take right away
- It’s okay if the step seems small – small steps can make it feel less overwhelming
- The critical part is to get started
- Keep going until you hit your goal
- Having a buddy to keep you accountable can help you stay on track
Examples: Cooking or entertaining at home, refinancing a loan to a lower interest rate, reducing expenses, thinking about ways to generate more income, taking budget-friendly trips.
Key Takeaways: Credit and Debt Pro Tips
- Check your credit reports on a regular basis (at least three times a year is a good place to start). It’s possible for errors to exist.
- You can build credit by starting with a secured/unsecured credit card.
- Aim to maintain your credit health through responsible credit habits.
- Try to use less than 30% of your available credit (then pay it off)
- Try to make on-time payments
- Consider having a mix of different types of accounts
- Aim for a long credit history
- Try to minimize derogatory marks, like collections or bankruptcy
- If possible, don’t apply for a lot of credit. (Usually, it adds a hard inquiry to your credit report.)
- It’s a good idea to build an excellent credit score before you might actually need it.
- If you’re dealing with overwhelming debt, take time to reflect on how it’s impacting your life and where you are with your finances currently. Then, identify how you can improve your situation and take action.
Credit Karma Resources for Small Business
Credit Karma focuses for the most part on personal credit, however, there are some small business resources on credit score, credit cards and business loans that are worth checking out:
- What is a Business Credit Score?
- How to Build a Good Business Credit Score
- Business Credit Cards
- Business Loans
We hope you found the information that Jennifer provided useful, and that you now have a better idea on tips for how to better manage your credit and debt. To learn more about Credit Karma, visit their website.
Each month Credit Karma we’ll be introducing you to two new people and their real life journeys with credit and debt. Click here to find out more about #MyMoneyStory.
Have questions about how Kabbage can help grow your small business? Leave us a comment on Twitter: @KabbageInc, or email us at email@example.com. You can also sign-up for our free small business newsletter to get access to more webinars and business tips by entering your email in the form at the top of the sidebar of this blog.
Thanks for listening in, we hope to see you next time!