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According to the Federal Reserve, 44% of the U.S. population does not have $400 saved to cover an emergency. That means an unexpected $400 emergency “expense would be more challenging to handle” and not to mention stressful if “they either could not pay the expense or would borrow or sell something to do so.”
Some of you may have felt the stress of needing money to cover an expense but have no savings and no access to credit. When you’re unable to cover the costs of emergencies, you’ll feel less secure. There is no peace of mind when you’re wondering how to make it through the financially challenging time.
Emergencies happen. It’s not a matter of if, but a matter of when they’ll happen. Everyone should have an emergency savings fund. And if you don’t have one, start one right now. Savings are important because it lessens your reliance on credit or the need to take out high-interest loans.
Let me get this out of the way. I’m not opposed to the use of credit. Credit is a tool and when used mindfully can help one weather an unexpected emergency. However, uncontrolled used of credit leads to long-term debt. Debt is a ball-and-chain that will make it more challenging to achieve your goals and pursue your dreams.
If you’re looking to have peace of mind, it’s important to have your finances in order and that includes a better relationship with credit. You can feel a greater sense of financial security when you can control and use credit as a tool.
Control credit and gain peace of mind
First answer the question: what does credit mean to you? What thoughts come to mind when you think of credit? Understanding your thoughts and feelings about credit can help you uncover some limiting beliefs. When credit is misused it leads to high-cost long-term debt. And in some cases, credit is misunderstood and avoided causing issues when you try to find an apartment or shop for cell service.
Know where you’re money is coming from and where it’s going
Every financial journey starts with a budget which is just a word to describe a system to monitor your spending. Budgeting is an eye-opening process. How much money are you making? How much money is spent on your living expenses, bills, or discretionary spending? It’s important to know your income and expenses before diving deep into credit.
The budgeting process can uncover how much you’re spending above your means. This can help you see how credit plays a role in filling in the income shortage. When you see and accept that you have a heavy reliance on credit, you can then take the next step to lower your expenses.
Lower your expenses and align your spending to your income
Find ways to cut back on monthly expenses. Your expenses include housing, food, and other living costs. Reducing your overall living expenses will lessen the amount of money you need and the amount of credit used. When you’re mindfully using credit and stop adding to your debt, then you’ll begin to take control.
Pay yourself first each and every payday
Having a healthy savings account gives you back control because you’re less dependent on credit. Set up automatic transfers from your direct deposited paycheck to a savings account. Not only is this a good way to save money, it will keep you motivated. There is nothing motivating about working hard all week long only to see each penny earned go towards expenses and bills. If you want peace of mind, you need to pay yourself first to build a savings account to cover emergencies.
Make more money and pay off debt
The less debt you have reduces the number of hours you need to work to earn money. When you carry debt, your future hours are obligated to working for money. And if you’re looking at controlling credit, tackle your unsecured debt first which is usually a result of credit card use. Find ways to make more money through side hustles and use what you’ve earned towards your debt. Carrying less debt contributes to overall well-being. It lessens the amount of money you need to make each month to cover your loan obligations. Lower loan payments can mean less time working and more time spending with loved ones or pursue a purpose.
Now, let’s talk specifically about taking control of credit.
Take control and access your free credit report
Your credit history is compiled by private companies called credit bureaus. It is accessed by lenders to determine your eligibility for credit approval. Taking control of your credit means understanding what’s found in your credit report. You can access your credit report through the federally mandated website AnnualCreditReport.com.
Monitor your credit and protect yourself
Identity theft is a reality and can cost you time and money. Monitor your credit by reviewing your credit report along with a paid or free credit monitoring service. These services alert you whenever someone attempts to access your credit or sends notices about changes found in your credit report. Knowing when these happen sooner can help you respond quickly to any negative report or fraudulent situation.
Track and improve your credit score
Finally, you want to track your credit score. Credit scores are based on the information found in your credit report. Credit scores help lenders and you quickly determine how you’re using credit.
You want to maintain a high score by managing credit well and ensuring information found in your report is accurate. If you come to learn your score is low or considered poor by creditors, it can signify that financial stress may be on the horizon for you.
So what happens if you find out you have a low credit score? By fixing your credit, you can improve your credit score which can lead to better financing options and terms.
There are many resources available that can help you fix your credit and improve your score. I’ve written about many ways you can do so on phroogal. And there are services like Lexington Law that have expertly trained advisors that guide you through a credit improvement plan. Lexington Law has been around for years helping people dispute inaccuracies on credit reports. It’s true you can do the work yourself and fix your credit to improve your scores. However, having a paid-for support system and expert access can lessen your stress.
My only suggestion is that you read the fine print and terms of any service–paid or free–you join. Be wary of any person or company offering you unrealistic results and exaggerations of how to increase your credit score. It takes time and work to fix bad credit.
When you have a better understanding of credit and your relationship to it, you’ll learn how to use credit mindfully. Again, credit is a tool and when used correctly can help feel secure and support your peace of mind.