A budget is a plan for how you earn, spend, save, and invest your money. The goal of every successful budget is to have enough money to cover your expenses. To do this, we have created three steps that will help you create a budget:
Step 1: Make a list of all the money you have coming in, otherwise known as your income. It is important that you list your net income, or your income after taxes and deductions are taken out.
Step 2: Make categories for all your expenses. Once you have your categories created, track your spending to figure out where your money is going. Expense categories include housing payments, transportation, groceries, utilities, retirement savings, emergency savings, cable, internet, phone, entertainment, pets, personal care, and more.
Step 3: Subtract your total expenses from your total net income to determine how much money you have leftover. Now would be a good time to go back to step two and review your different categories based on whether these items are things you want or things you need. By doing this, you may be able to find some ways to cut back on expenses.
Credit can be defined as someone willing to loan you money, called a principal, in exchange for you promising to repay the money later, usually with interest. If you want to buy a home, a car, take out a personal loan, or get a credit card, it is important to pay attention to your credit history and credit score.
Your credit report shows a record of all your credit history, or in other words, your debt history. This includes current loans, past loans, credit inquiries, bankruptcies, and collections. You can pull your credit report for free once per year from each of the three credit reporting bureaus: TransUnion, Equifax, and Experian. If you find an error on your credit report such as a credit card or loan listed that does not belong to you, a wrong name listed, or a paid-off collection item showing as unpaid, you can file a dispute with the credit bureau in question. You can do this online by visiting the credit bureau’s website or you can mail in your dispute.
Your credit score takes information from your credit report and generates a score based on different factors including:
- Payment History
- Length of Credit History
- Mix of Credit
- Number of Inquiries
All these variables are weighted differently and produce a number that lenders use as an indicator of risk. Your credit score also helps lenders determine your interest rate. The higher your credit score, the better interest rate you will get which can save you money in the long run.
Payment history is the largest factor in calculating your credit score. This includes whether you pay your bills on time and in full, how many late payments you have on record, and how long ago was your last late payment. If you make your payments on time and in full, one-third of your credit score will remain intact.
Capacity measures your ability to repay a loan by calculating your debt to income ratio. Your debt to income (DTI) ratio compares your monthly debt payments to your total monthly pre-tax income. Studies have shown that those with a higher DTI have a harder time paying off their loan which is why this number is important to lenders.
Length of Credit History
Lenders and credit reporting bureaus look at how long you have had credit; the longer you have had credit, the easier it is for lenders to look at past behavior and predict future behavior. If you are new to credit, you will need at least six months of reported history before you will have a credit score.
Mix of Credit
Your credit score is also calculated based on how many different types of loans and accounts you have. The more loans you have, the more it will affect your credit score. It is important to remember, however, that not all credit is weighted equally. For example, mortgage loans are typically considered “better credit” than a retail credit card.
Number of Inquiries
Every time you apply for credit, your credit score will take a hit. However, if you are rate shopping for the best interest rate on a loan, this will be considered as one inquiry so long as the loan applications fall within a certain window (usually 14 days).
The first step in evaluating your debt is looking over your budget or perhaps even creating a budget. A budget is a plan for how you earn, spend, save, and invest your money. By evaluating or creating a budget, it will help provide a road map on how you can spend your money and avoid using credit. It will also help you find extra money that you can put towards your current debt. For more information on budgeting, visit our budgeting page.
Once you have looked over your budget, it is time to put it into action. One way you might be able to consolidate debt is by refinancing your loans or opening a debt consolidation loan. For instance, if you have a home loan with a high interest rate, you can refinance it at a lower rate and save money over the course of the loan. The same concept can be applied for debt consolidation; when you open a personal loan, or debt consolidation loan, you are taking out a larger loan and using that to pay off your other debts. For example, credit card interest rates are typically very high; the goal of taking out a personal loan is to pay off your credit debt at a lower interest rate which will help you pay off debt faster and save you money.
CTCU offers personal loans, home refinance, and auto refinance loans at competitive rates and terms to fit to your budget. If you want to go ahead and get a head start on consolidating your debt, click here to begin your application!
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