It is important to monitor your personal finances if you want to build a strong credit profile. Your credit report records your financial behaviour and makes it easier to track them. It is easy to spot and fix the root causes.
You can also improve your credit score by reviewing your credit reports at least once per year. But, following only your credit reports won’t help you build your finances.
Sometimes we make mistakes that may not be reported on our credit reports but can still affect our credit score. Other moves may not affect your credit score but could cause financial problems down the road.
Your credit score is the most important indicator of your finances, but other indicators assess different financial habits. Although you might think that traditional financial advice is safe, it is important to realise it may not always work.
Continue reading to discover four personal finance tips you cannot ignore.
Myth Buster – 4 Personal Finance Tips to Avoid
You can carry monthly balances on your credit cards:
This myth can end up costing you thousands or even thousands of pounds over the long term. People will tell you not to pay your credit card balance. To maintain your credit score, you must “carry” the balance month to month, which is the worst thing that you can do.
It ultimately boils down to how credit cards work. You receive a credit card statement each month. The current balance and the statement balance are usually the same unless you have accumulated a lot of debt in the past.
You won’t get a late payment on your credit report if you only make the minimum monthly payments. This will ensure that your credit score is not negatively affected. However, you will end up owing interest for the balance unpaid.
Credit card interest rates often exceed 20% APR so you can end up spending a lot more money over the long term, which could lead to a debt trap. It would be best if you did not scrimp on your credit card balance.
Your credit score is affected by loans you take out
Credit bureaus consider many factors when calculating your credit score, including the credit mix. It’s better to have multiple credit types (e.g. credit cards, auto loans and student loans) than to have a lot of credit of a single type.
This is why some people choose not to pay off their loans. This is the same reason why credit card debt is bad. You end up paying more interest over the long term than if you paid your loan on time.
Cancel any unused credit cards
Your score may be affected by cancelling a credit card, but that depends on the lender. Your overall credit usage may rise, which could negatively impact your score. Credit utilisation is the percentage you use of your credit limit.
If you have a credit limit of £2,000 and only use £1,000, your credit usage is 50%. If you cancel a credit card, and your limit drops to £1,500, you will only be able to use 75%.
Lenders consider your credit limits when deciding whether or not to approve you. This is to determine if you can handle new credit. They prefer to keep your credit utilisation below 25%.
The only way to save money is to cut your expenses
The golden rule to financial health is to spend less money than you make. It makes perfect sense to cut down on your spending if you want more money.
This is a fantastic idea in theory. It’s not easy in practice. It is smart to reduce expenses where possible, but it may not be sustainable if you begin to cut your budget and eliminate all non-essential costs.
Financial health is all about financial responsibility. If you avoid eating out, going on summer vacations with your family, or buying a morning latte, you’ll likely be dissatisfied soon. You may even abandon your budget and fall back into old habits.
What personal finance options can I use to secure my future?
Personal finance includes a variety of financial services and financial benchmarks such as:
- Banking: Banking involves maintaining an active bank account, facilitating transactions, and utilising responsible credit via credit card or overdraft.
- Investments: build wealth over the long-term, allocate your money to multiple sources.
- Save: You can save a portion of your income to build a fund for emergencies.
- Budgeting: Create a budget to analyse your expenses and allocate a fixed amount to each payment.
- Mortgage: A mortgage is a financial product that allows the purchase of the property. This property serves as collateral to the lender until the mortgage loan is repaid.
- Pension / Retirement fund: A retirement fund is an investment option that allows people to retire some of their income.
Some personal finance advice is not useful. It is important to have financial resilience, which can help you weather any financial storm. It is, therefore, crucial to find the best strategies for your financial and personal circumstances.