Managing money is an art. If you have read my blog in the past, you know that I am a big stickler for maintaining an emergency fund. Just like an emergency fund can help you in difficult times, it is important to manage your credit to prevent yourself from being and a credit-related catastrophic financial situation. Let’s take a close look at practical ways to manage your credit wisely.
The jargon surrounding Credit often revolves around a credit score. Don’t know what a credit score is? Here is a quick video from Trans Union on the importance of a credit score.
Let’s take a look at five ways to manage your credit to help save you money.
Making a late payment directly impacts your credit.
Everyone should follow the rule to make payment and that too promptly. If the amount relates to your mortgage, then its best to pay more and apply the additional amount to pay off your principal.
Perhaps, it should be your goal to make payments online and on time. Defaulting on debt can have some seriously unfortunate repercussion. You could face late payment fees and which may adversely impact your credit score.
Depending on your payment, you can best enroll in auto pay, which will save time, money, and allow you to always be on time with your payments.
Skipping your monthly payment
When you take on debt that requires you to make monthly payments to a creditor, you are essentially getting into a contractual obligation with the creditor to pay a set amount of payment to pay off the money that was loaned off to you.
The debt can be in any form, personal loan, student loan, credit card
debt, auto loan, or mortgage. Skipping a payment will cause you late fees and penalties.
Since the majority of the people don’t maintain an emergency funds and live life paycheck to paycheck, skipping a payment creates a scenario where you are required to make two payments instead of one on the next due date. If not paid, the debt and additional fees can have a negative effect of your credit score, which will be challenging to build up.
Defaulting on debt and become delinquent
Debt is classified into secured debt and unsecured debt. You don’t want to default on your mortgage. When you default on a secured debt, the lender or the investor has some recourse option depending on the security that is involved in securing the debt. For example, in case of a mortgage, the bank would reclaim the possession of your property when you default on debt, thus further ruining your credit.
An unsecured debt works a little differently. Since unsecured debts are not backed up with security or collateral, the lender of the mortgage still has an option for legal recourse in the event of a default. Credit card companies often declare the account as noncollectable and sell your uncollected debt to a collection agency.
The borrower would then be responsible for paying off their debt to the agency. With unsecured debt, no assets are securing the debt; even then, the lender still can have a recourse in the event of default.
Credit card companies often give a few months before an account goes into default. However, if after six months or more, there have been no payments, the report would get charged off meaning the lender would take a loss on the account.
The bank would likely sell the charged-off account to a collection agency, and the borrower would need to repay the agency. If the borrower fails to pay the debt to the agency, then the agency can place a judgment lien in a court against the assets of the debt holder thus ruining your credit in the long run. So a big lesson; Only borrow money, if you can pay it off on time.
Not consolidating your debt will not help manage money effectively.
You should always take advantage of debt consolidation. Credit card debt often carries a hefty interest rate charges. If you have a lot of credit card debt, you are better of consolidating the deficit with a personal loan.
The benefit of debt consolidation is the loan that you will borrow to pay off the debt will be at a lower interest rate and grant you time to repay in the next 8-10 years. Paying debt backed up with the high-interest rate and replacing it with debt with a lower interest rate with additional time can prevent ruining your credit score
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