Personal Finance Education Basics

Take the Right Steps to Get Out of Debt, Improve Your Credit, and Build a Strong Financial Future

The American educational system does not teach us the basics of building and maintaining a healthy financial life.

Not being taught about credit, debt, savings, or building for retirement sets us up for failure.

Even the most basic financial education, like how to balance a checkbook, is neglected. This means it is up to each of us to take the right steps to learn about personal finance and to establish good financial habits.

Bills.com gets a lot of questions from readers struggling with credit, debt, and personal finance basics. These questions often raise a few inter-related issues, including how to:

• Change established spending habits that lead to debt
• Get rid of debt that's built up
• Build and maintain a strong credit rating
• Educate oneself in order to build a strong financial future

Personal Budgeting Tips

You won't stop incurring debt, without making a strategic plan and sticking to it. The problem is not going to take care of itself. Start your new path by looking at your current finances in detail.

• Make a budget- Making a budget is the cornerstone of establishing a stable and orderly financial life. Track all of your expenses, your monthly expenses and the ones that occur occasionally. There are a ton of free budgeting resources available online, including the Bills.com budget guide.
• Control your spending- Don't get caught up in today's consumer culture. Do you really need a new phone? Even a small change in spending habits bring a huge pay-off, when projected out over a number of years. Use the Bills.com Savings Machine, to see how much you can save, by cutting out one or more of your regular expenses.
• List your debts- It is important for you to see who you owe, how much you owe, the size of your required monthly payments, and your exact interest rate. These facts will dictate how you prioritize paying off your debts and what kind of debt relief option is best for you.
• Set aside money for emergencies- By their very nature, emergency expenses pop up without any notice. The only way to be prepared is to build and maintain a "rainy day" fund. Even if you only put a small amount aside out of each paycheck, it is important to start building an emergency fund. Standard advice is to have at least six months of living expenses set aside. That may seem like a tall order, but don't let that discourage you.
• Establish goals for retirement- It is never too early to start planning for your retirement. You may need to first focus more on paying off your current debts, especially if they are high-interest debts, but you can start setting retirement goals right now. The sooner that you start setting aside money for retirement, the longer time it has to grow. The difference in how much money you'll have at retirement, if you start saving in your 30's compared to if you wait until your 50, is staggering. Look at the big picture; if you have an employer that is matching what you put in a retirement fund, it can make sense to put money aside even when you're carrying debts.

Get Rid of Your Debt

Carrying debt, in and of itself, is not a problem. Debt problems arise when you're carrying too much debt for the amount of income you make. Sometimes, through bad choices or through circumstances beyond our control, we take on debt. Whether your debt is due to spending beyond your means or due to paying for basic needs after a job-loss or hefty cut in income, it is important to take control of your debt. Until you resolve outstanding debt, it can be very difficult to build a strong financial foundation. It is time to look at all the available debt relief alternatives, when you're:

• Paying a high cost to finance your debt- If you have high-interest credit card debt, you may benefit from a credit counseling program's debt management plan. If you're carrying high-interest student loan debt, look into a debt consolidation loan.
• Stuck in minimum payment cycle- If you make only your required minimum monthly payment on a credit card debt, you end up paying far more for your purchases than the sticker price. It takes years of minimum payments to pay off credit card debt. Use the Bills.com Minimum Payment Calculator to see how much money you can save by sticking to a constant monthly payment that you can afford.
• Struggling to make your monthly payments- Your debt relief options narrow, when you're having trouble making your required payments. Look into a debt settlement program, as it is one option that can probably lower your monthly payment, while shortening the time it takes you to get out of debt. Only work with a debt settlement program that does not charge advance fees.
• Unable to make your payments and your debts go into collections- If your debts are so delinquent that debt collectors are taking legal action against you, filing for bankruptcy may be your best alternative. If you qualify for a Chapter 7 bankruptcy that wipes out your debts, the fresh start it gives you can outweigh the harm to your credit score.

Establishing Credit

You may want to build a good credit score, but get turned down every time that you apply for credit. It is somewhat of a Catch-22. You need to use credit responsibly in order to build good credit, but how can you do that when no one will give you a chance to prove you've changed. The good news is that your bad credit is not a permanent mark against you. Most anyone can build their credit from poor to very good or excellent within two years, if they take the right steps.

Here are a few basic steps to establishing credit accounts, even when you have poor credit.

• Secured credit card-One way to get positive information on your credit report is to get a secured credit card. You have to pay a fee to get a secured credit card, but the good part is that a secured credit card will report your monthly activity to the main credit bureaus. You can use the positive history to apply for other lines of credit.
• Use a co-signer- There are times when a person's credit rating is so bad that even a secured credit card is not obtainable. In that kind of case, it may be necessary to get a co-signer, in order to get positive information to appear on your credit report. Finding a co-signer can be very difficult, because the co-signer is fully responsible for your debts. However, if your soon-to-be spouse has good credit, he or she is a likely potential co-signer that can act as a springboard to help you boost your credit rating.
• Apply for a store credit card, a gas-station card, or finance a store purchase- All three of these types of credit accounts generally have looser qualifying credit requirements than a major-bank credit card. However, they often come with a higher interest rate. For credit rates, a high-interest rate is not a problem, if you pay your debts off in full each month. Your goal is not to run up debt on any credit account you're granted, but to show that you can use the credit you're granted and pay it off as agreed.

Build and Maintain Good Credit

Once you start establishing new credit accounts, follow a few simple rules and you'll see your credit score rise. The two most basic rules to establishing strong credit, which make up 65% of your credit score, involve:

• Timely payments- It is crucial that you pay all your bills on time. It takes being 30-days late to harm your score. If you are even one day late, however, your interest rate can be hiked to over 30% and you'll be hit with late fees. That won't necessarily harm your credit, but the extra costs can throw off your budget and cause a domino effect of financial problems.
• Credit Utilization- Your credit score factors in how much of any credit line you're granted that you use. If you pay off your cards in full each month, you'll keep your credit utilization low and help your credit score rise faster.