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Credit Management Part 2: 4 Effective Steps To Improve Your Credit Behavior

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This is the second article of the 2-part credit management series that will focus on credit behavior.

Now that we know more about how money habits are formed, it is time to discuss how you can use it to change your credit behavior. When you have better credit habits, you will not feel threatened when you use credit. You will feel confident that you know how to use it in such a way that it will not compromise your finances.

Take the Millennials for instance. They have a lot of debts but they also have shown that they can save money too. In fact, 3 out of 4 people have $100,000 or more saved up. This is despite the fact that they have the most student loans.

As you can see, it is possible to have a lot of debts but you need to make sure that you have the right credit behavior to keep it from ruining your personal finances. So how can you develop the right habits? And how can you get rid of the wrong ones?

Eliminating bad credit behavior

You can use the same process when you want to get rid of the credit behavior that is keeping you in debt. Here are the 4 stages that you should go through if, for instance, you want to stop relying on your credit cards to pay for basic necessities.

Cue

The key to removing bad credit behavior is to make the cue invisible. If you want to stop using your credit cards, what is your cue? It can be the credit card itself or avoiding shops unless you have to buy something.

Craving

When it comes to the craving stage, you have to make it unattractive. Remind yourself why using your credit card is a bad idea. You can opt to stick a piece of paper on your card that shows your current balance. That should make using the card unattractive.

Response

If you get past the craving stage and you still want to use your credit card, make it hard to access it. Some people would put their cards in a plastic bag, submerge it in water, and then freeze it. If you have to go through thawing the card to use it, then you will probably not use it anymore. Or you can ask a trusted relative or friend to keep it for you. That way, you will have to travel to their house so you can access your card.

Reward

Finally, the reward should be unsatisfying. Although using your credit card makes the purchase convenient, it will also compromise your finances. You need to remind yourself of that fact every time you want to use your card. You will be paying more on the purchase because of the interest rate.

If you follow this, you should be able to get rid of your bad credit behavior.

Creating better credit behavior

To create better credit behavior you still need to follow the 4 stages of habits. For instance, you want to develop the habit of making a list before a shopping errand. The purpose is to avoid overspending. With the way 86% of Millennials overspent during the last holidays, there is a serious need for better credit habits.

So what can they do to create better credit behavior?

Cue

If you want to trigger better credit habits, you need to make sure that your cues are obvious. You don’t want your brain to miss it. For instance, you can set up reminders so you will remember to make a list before you go out to buy what you need.

Craving

Sometimes, even if the cue is obvious, you do not feel the craving because there is nothing appealing to the task. If you want to develop the habit of making a list before a shopping errand, make an appealing task. Use your favorite notebook or pen so you always know where it is when you need to make a list.

Response

When you do the task, you have to make sure that it’s easy. If it’s hard, you will most likely not do it. For instance, if you want to develop the habit of making a list to control your spending, you need to make it easy to do. Use the notes that you have on your smartphone. Or download an app that will help you make this list and stick to it.

Reward

Once you have completed the response, you have to make sure that your reward is satisfying. Highlight that so you will be motivated to practice the habit again. Like if you want to develop the habit of making a list before going out to buy anything, make sure the reward is clear. The fact that you did not overspend is rewarding enough. Not having to rely on debt is also a reason to celebrate.

Different Strategies To Reach Financial Targets Faster After Debt Consolidation

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Having financial targets after debt freedom is the best way to start your new life. Having paid off your consolidated debts is one of the best feelings in the world. It gives you a sense of accomplishment. It makes you feel like you can do anything.

Well, this is true. You can do anything as long as you have the will and motivation to do it. And making new plans while you are still feeling high about your success is the best way to go. It makes you more ambitious as you aim to improve your finances significantly.

When it comes to financial improvements, you are not alone. A survey revealed that 51% of consumers are focused on paying down their debts this year while 53% have every intention to save more. Both of these are direct ways to improve your personal finances. If you can do both simultaneously, the growth of your finances will be quick.

However, not everyone has the finances to accommodate both. This means they are forced to work on one goal at a time. That is okay. You just have to keep on doing what you did while you were paying off your debts. But this time, instead of focusing on your debt payments, you will be prioritizing something else. Continue working hard so you can start reaching new financial targets. These will help strengthen your financial future.

How to reach financial targets after debt consolidation

Right now, you are probably itching to celebrate your new-found debt freedom. But hold off your celebration for now. You will have your reward but you need to consider some things first. You have to consider the financial targets that you should be working on. Only after you have determined this should you allow yourself to think about your just reward.

So what can you do to set your financial targets after you have paid off your debts?

Make a list of all your goals

Start by making a list of all your goals. Ask yourself, now that you have paid off your debts, what do you want to achieve next? Do you want to buy your own house? You need to start saving for a down payment. Do you want to buy a more fuel-efficient car? This will help you save more money as a car owner. Since vehicles depreciate over time, it is best for you to buy this in cash. That can be your next financial goal.

The important thing is to identify what your next target will be. When you write it down, you develop a sense of accountability. It feels more real when compared to simply thinking about it. If you have a lot of financial targets, write them all down. Indicate the timeline by which you want these targets to be accomplished. Then you can create specific plans to reach each one.

Keep living below your means

Once you have the list of your financial goals, you need to keep living below your means. This should be easier because you already cut back on household spending to support your debt relief program. You can pull back a little to ease the strain. But keep living below what you earn each month. Use the extra money to start working on your financial targets. Choose your priority target and focus on that. Once you have done that, you can go on to the next financial goal.

Continue your side gigs

You can also reach your financial targets faster if you increase your income. Did you use a side a gig to help you earn more money for your debt consolidation payments? Why don’t you continue that? The more money you earn, the more you can contribute towards your financial goals. If you were saving for your new house, you can reach your target amount faster. Reaching your goals faster means you can go on to the next target that will take your personal net worth to the next level.

Focus on your progress

Finally, you should focus on your progress rather than the journey that you have to complete. It is just like trying to pay off your debts. Do not focus on the amount that you have to pay. Instead, keep your eyes on what you have already paid off. It will motivate you to keep going. Sometimes, knowing what you are capable of can fuel your drive to meet your financial targets. You can tell yourself that you have already come so far. You can keep going.

Staying out of debt to reach financial targets

Trying to reach financial goals is not an easy feat. It becomes harder if you also have debts to pay off. This is why most people have to wait to achieve debt freedom until they can freely pursue their financial targets.

In one report, almost 6 out of 10 Americans said that their debts can keep them from reaching their financial goals in 2020. So if you are in a position wherein you can pursue your goals because you have paid off your debts, keep it that way! Try to stay out of debt so your dreams will not be compromised.

Here are other reasons why you should make an effort to be cautious of using debt while you are pursuing your financial goals.

Secures your extra money

First of all, it secures the money that is meant for your financial targets. Instead of using your extra money to pay your creditors and lenders, you can use it to improve your financial position. When it comes to spending money, you will feel better knowing that your income is not being used to make your creditors richer. Instead, you are using it to make your own financial future better.

Keeps you from paying the interest rate

What makes debt a hindrance to your financial targets are the interest rates that you have to pay. This is especially true if you have high-interest credit card debts. It can really take up a huge part of your monthly budget. So if it is not needed, keep yourself from using your credit cards – or applying for a new loan. The only exception is if the debt can help you achieve your goals – like a mortgage, etc. But even so, you need to make sure you can keep the interest rate as low as possible.

Makes you creative

When you are forced to keep your use of credit down, you end being more creative. Instead of using your credit card to buy clothes, you can come up with new ways to revamp your old wardrobe. If your family wants to go on a vacation, think of ways you can do that without having to borrow money.

The truth is, it is not required to completely stay out of debt if you want to reach your financial targets. However, it is very important for you to learn how to use debt properly. As mentioned, if it will help you reach your goals, then go ahead. But be prepared with a repayment plan. If you want to use your credit cards, make sure you can pay it in full when the billing statement comes. That way, you can keep yourself from paying the high-interest rate.

How To Identify What Your Priority Debt Payments Should Be

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Knowing your priority debt payments will make debt freedom easier to accomplish. The idea is to pay off the minimum on the other debts and focus all your extra money on this one. The chances of quickly getting rid of the top debt will be higher.

When you have multiple debts, it can sometimes make you feel confused. Monitoring a lot of credit accounts at once feels overwhelming. It is an unnecessary feeling – especially if you know that you have the income to pay it all off. But you cannot help but feel stressed about it simply because you have to multi-task.

According to reports, 6 out of 10 Americans said that their heavy debts are causing them a lot of stress. It is also said in the same report that despite the stress they are feeling, they are also optimistic about everything. They know they can pay it off. Maybe not immediately, but they are positive that they can completely pay all their debts.

If you want to have the same confidence, you need to start by identifying your priority debt payments. This will force you to go through all your debts. It will give you an overview of your current debt situation and the gravity of the financial problem that you have to overcome.

When you have this knowledge, you will feel more in control. Knowing the extent of the problem will allow you to come up with the best solution.

It’s important to realize that people deal with debt differently. They have various preferences when tackling problems. So do not think that what works for someone you know will work for you. To find out your specific style of debt relief, start by identifying the debt payments that you consider as your priorities.

3 options to determine your priority debt payments

Did you know that 2 out of 10 Americans use between 50% to 100% of their monthly income to pay off their debts? It’s no wonder that it’s causing consumers a lot of stress. With the average debt being $38,000 or higher, you need to succeed in paying off your debt completely. This is a huge amount of debt to overcome. You want to make sure that you will succeed. To make the chances of succeeding possible, start by determining your priority debt payments.

To illustrate this better, let us assume you have 5 different debts with the following details.

  • Debt 1: Mortgage, $150,000, 4% interest rate, no credit limit
  • Debt 2: Student loan, $15,000, 8% interest rate, no credit limit
  • Debt 3: Personal loan, $2,000, 5% interest rate, no credit limit
  • Debt 4: Credit card debt, $3,000, 20% interest rate, credit limit of $15,000
  • Debt 5: Credit card debt, $7,500, 25% interest rate, credit limit $10,000

There are three ways for you to rank your debts according to priority.

By balance

This involves ranking your debts according to balance – specifically the lowest one. This is also called the debt snowball strategy. Based on the credit account samples above, your priority debt payments will be ranked as Debt 3 ($2,000), Debt 4 ($3,000), Debt 5 ($7,500), Debt 2 (15,000), and Debt ($150,000). The idea here is to get an immediate win. You will pay the minimum on all the other debts and focus all your extra money on Debt 3. Since it has the smallest balance, it is almost certain that you will pay it off immediately – maybe within a couple of months.

Once you have completely paid this off, it will make you feel good and motivated enough to pay off the rest.

By interest rate

In this option, your priority debt payments will be ranked according to the account that has the highest interest rate. Debt experts also call this the debt avalanche method. Looking back at the sample credit accounts, the ranking of the debts will be as follows: Debt 5 (25%), Debt 4 (20%), Debt 2 (8%), Debt 3 (5%), and Debt 1 (4%).

If the first option will help you get immediate success, this one will help you save money. In this case, paying off the high-interest credit cards is the best solution. It will take a bit longer to completely pay off the first debt. But the amount you will save will be bigger.

By credit limit

This is not a common option when it comes to determining priority debt payments. But it will also benefit you if you have certain financial goals in the future. In this method, you will be prioritizing the debt that has a balance that is closest to the credit limit. So if you base it on the credit accounts mentioned, the ranking will prioritize Debt 5 (balance of $7,500 and credit limit of $10,000) and Debt 4 (balance of $3,000 and credit limit of $15,000). The other three do not have a credit limit so you can choose if you will rank them according to balance or interest. If, for instance, you want to save money, the rank will be Debt 2 (8%), Debt 3 (5%), and Debt 1 (4%).

In this option, you are trying to improve your credit score fast. It is ideal if you want to condition your finances to tackle another financial goal. All the other options will improve your credit score as long as you stick to your payments. But if you need immediate improvement, then this is the best method to follow.

Why is it important to determine the priority debt payments

The truth is, it is not just about paying off the debt. You want to find your priority debt payments because you want to set up your future too. Paying off the debt is necessary but you want to hit two birds with one stone by making sure you are still going where you want your financial future to go. Once you get out of debt, you don’t want to start from square one. You want to be poised and be ready to take on your next financial goal. There are many strategies to pay off your debts fast. At least one of these options will help you get to your goal faster.

Choosing the priority debt payments can depend on what you want to happen.

If you want an immediate win…

In case you want to stay motivated in your debt relief option, then you should choose your priority debt payments based on their current balance. The lower the balance, the higher it should be in the ranking. When you focus on the smallest balance, this will be paid off faster. That will give you the encouragement that you need to continue with the rest. Before you know it, your one debt away from debt freedom.

If you want to save more…

If saving money is more important to you, then you need to rank your debts according to the highest interest. One of the ways for you to save on your debt payments is to eliminate the high-interest debts first. The longer it takes to pay off a debt, the more you end up paying towards the interest. So let the low-interest debts stay in the backseat for now.

If you want to improve your credit score…

Considering the credit limit will allow you to work on improving your credit score faster. For instance, if you want to buy a car in 12 months, then having a better credit report will help you get better terms on the loan. The same is true if you want to apply for a mortgage. Focus on the credit limit to raise your score through the credit utilization rate.