Smart Money Podcast: How to Manage Credit and Debt for Financial Wellness in 2024

Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions. In this episode:

Prepare for financial health in 2024 with expert strategies for managing your credit and getting and staying out of debt.

What’s the right amount of credit utilization to maintain a high credit score? How can reviewing your credit reports impact your financial health? Credit Nerd Lauren Schwan joins host Sean Pyles to answer these questions and more as they delve into the intricate world of credit and debt management. They discuss how you can overcome the financial strain that typically follows the holiday season and focus on strategies that could enhance your fiscal health.

They explore many different aspects of credit management, including analyzing holiday spending patterns, maximizing credit card rewards, assessing the value of annual fees, and planning for upcoming major expenses. Sean and Lauren also talk through the complexities of credit scores and offer strategies for paying down credit card debt, especially in the context of rising interest rates.

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NerdWallet stories related to this episode:

How to Get Your Free Credit Reports From the Major Credit Bureaus

Knock Down These 5 Roadblocks to Improving Credit

How to Write a Credit Dispute Letter to Fix Credit Report Errors

Have a money question? Text or call us at 901-730-6373. Or you can email us at [email protected]. To hear previous episodes, go to the podcast homepage.

Episode transcript

This transcript was generated from podcast audio by an AI tool.

Sean Pyles:

The holidays are behind us, but for a lot of people, the purchases they put on credit aren't. It's so easy to just pull out the plastic for anything and everything, especially around the holidays. But the key to financial success is to make sure you're doing whatever it takes to pay off those credit cards.

Lauren Schwahn:

We can't undo our spending unfortunately, so the best thing to do is just make a plan for managing it going forward, and that can take some of the stress out of it.

Sean Pyles:

Welcome to NerdWallet's Smart Money Podcast. I'm Sean Pyles.

Lauren Schwahn:

And I'm Lauren Schwahn.

Sean Pyles:

This episode continues our nerdy deep dive into your money in 2024. We're running down some of the most important financial moves you can make to have a great year in money. Today, I'm joined by Lauren Schwahn, our credit nerd. Welcome back, Lauren.

Lauren Schwahn:

Thanks, Sean.

Sean Pyles:

So today we're going to be talking about credit and specifically the best ways to manage it as we move through 2024. We know this is something a lot of folks are concerned about. NerdWallet's recent credit score study found that nearly four in five Americans are trying to improve their credit right now, but that half of Americans say they face roadblocks to doing so. Our credit lives can influence so many other parts of our lives, and if we mess it up, it sometimes seems like that can be a death knell to our finances. So Lauren, do you want to give us a reality check and talk a bit about why managing credit might seem difficult?

Lauren Schwahn:

Yes, absolutely. I think credit can seem a little bit scary because it's kind of a mystery. Our scores are always changing and they're sensitive. There's a lot of factors that can influence our scores and it's hard to predict exactly how they'll react to our financial behaviors. Also, if you don't have much of a credit history, building your credit can be really tricky, and we don't have total control over our credit lives either, which is a little bit intimidating. We didn't ask credit scoring companies to give us scores, and yet so much of our financial lives rides on them, as you mentioned. So for those reasons, the credit world can be really unfair to those who've had maybe a stroke of bad luck or are dealing with systemic problems.

Sean Pyles:

So obviously this is really important to our financial lives, but it's not something that should keep us up at night, right?

Lauren Schwahn:

Right. And I think for all that confusion and anxiety that surrounds credit, it's important to remember that the fluidity of it can be a really good thing actually. So if you're not happy with the state your credit is in at the moment, there are things that you can do to build it over time.

Sean Pyles:

All right. Well, we are going to have all kinds of advice coming up for how you, dear listener, can best manage your credit life. But in the meantime, we want to hear what you think about credit, debt, and anything else. Leave us a voicemail or text the Nerd hotline at 901-730-6373. That's 901-730-NERD, or email a voice memo to [email protected]. Stay with us. We're back with more in a moment. So Lauren, it's the start of a new year and we're going to talk about the best ways to manage credit and debt. But first I'm curious whether there's anything you do at the start of the year so that you can help yourself along these lines any reviews you do of the previous year or mental exercises to figure out how you're going to manage your own credit life in the coming year. Anything you'd like to share with our audience?

Lauren Schwahn:

Yes, there are a few things. First, my husband and I will look over our holiday spending together because we usually buy our gifts independently so we're not always aware of how much the other person has been spending. Then we make sure to pay those balances as quickly as possible to get our credit utilization back on the low end because it usually gets pretty high around the holidays. And then a couple of other things that we do are we'll review which credit cards that we have open and how we use them over the last year just to make sure that we're maximizing our rewards. So if we were spending a lot at restaurants, are we using the card that earns us the most points on that? And then if we're paying any annual fees on those cards, we want to make sure that it's still worth paying those.

Something else that we do is we try and plan out some of the bigger purchases that we expect are going to come up throughout the year so that we can either set a budget and save for them in the coming months, or we can maybe open a credit card if we want to take advantage of a signup bonus. One example is just that we have a lot of birthdays in our family in the spring, and then my kid's school is closed for spring break, so we usually take a vacation around that time. So that might be a good time for us to open a new credit card and take advantage of that extra spend.

Sean Pyles:

Nice. I think that January is when a lot of us takes doc of what we spent over the holidays and kind of go, "Uh-oh." Of course it's better if we know what we're spending while we're spending it, but sometimes the holidays just get a bit out of control and we lose track of that. And I think it's a good idea to check in on what you have spent, but maybe don't feel bad about it, although you should resolve to deal with it. Right?

Lauren Schwahn:

We can't undo our spending unfortunately. So the best thing to do is just make a plan for managing it going forward and that can take some of the stress out of it. A couple ways to start, you can just look at all of your accounts and their balances and then make a note of what the minimum payment amounts are and their due dates. And then if you're able to pay all that off with the money you have right now, that's great. You might consider temporarily freezing your spending or reworking where the money in your budget is going just to help make up for that extra spend during the holidays. But if you can't make more than the minimum payments on your cards, I would pay extra attention to the interest rates you'll be charged. That can just help you be aware of what you are going to be on the hook for. And then possibly you could prioritize between which ones you want to pay extra towards first.

Sean Pyles:

Well, let's talk about, let's say the top three most important things to look at when you're evaluating whether it's time to start doing something different when it comes to managing credit. How do you know if you're doing it well? What would be number one for people to ask themselves?

Lauren Schwahn:

I would say, are you paying your bills on time? Because payment history is the biggest factor credit scoring companies consider when they're calculating your credit scores and not paying on time can lead to things like late fees or interest charges, and that might damage your credit scores.

Sean Pyles:

And what would be a second factor to consider or evaluate?

Lauren Schwahn:

How much of your available credit are you using? So credit utilization is another major part of your credit scores, and typically you want to aim to keep the utilization under 30% if possible. To find your utilization ratio you can add up your balances, add up the credit limits on those cards, and then divide your total balance by your total limit and multiply that by a hundred. But that's a little complicated. So you can also just keep it really simple and find an online calculator and plug all that information in. When you do that, if your utilization is higher than that 30% target, see if there are some feasible ways that you can lower it. Can you make payments more frequently, for example, not just once a month or can you reduce your spending? Another thing you can do is ask your credit card company to increase your credit limit on an account you already have. So just call the number on the back of your card, or you could try even applying for a new credit card and that can help boost your overall credit limit.

Sean Pyles:

How about a third? What's another element of credit life to take another look at when you're evaluating how you're doing?

Lauren Schwahn:

See what your credit scores and reports show. You can check your credit scores and reports for free. And then when you're checking your scores, what does that number tell you? Is it where you want to be? And then your reports will show your credit accounts and their statuses. Do all those things appear to be in good shape? Is everything accurate? So you can dispute some errors that might be affecting your credit if you spot any.

Sean Pyles:

Lauren, you mentioned credit reports, so let's go deeper into that. The start of the year is a really good time to check your credit reports. I mean, you can check them anytime of course, but it's kind of like testing the fire alarms on New Year's. The start of the year is a good time to do that due diligence. So describe for us how to check your credit report and what to be on the lookout for.

Lauren Schwahn:

Annualcreditreport.com is the official site that you can use to get your free weekly credit reports. You don't have to check it that often, but that's how often they're available to you for free. And those come from the three major credit bureaus. So Equifax, Experian, and TransUnion.

Sean Pyles:

And it's really important that people actually go to that site specifically, annualcreditreport.com. There are some look-alike sites out there that might try to charge you for access to your credit reports, which you can get for free at annualcreditreport.com. So please be mindful of that. So Lauren, when our savvy listeners go to annualcreditreport.com and get their credit reports, what are they going to see?

Lauren Schwahn:

Your reports will show some personal information like your name and address, and you'll also see information about your accounts, what type of accounts you have, whether they're open or closed, what the payment history is, and the balances and credit limits. Your reports will also show credit inquiries. For example, if you recently applied for a credit card, you should see that reflected there and they'll show negative marks like any bankruptcies you may have.

Sean Pyles:

Can you talk about what red flags people might want to be on the lookout for when they are reviewing their credit reports?

Lauren Schwahn:

Sure, you'll want to be on the lookout for errors or signs of fraud. For example, addresses or accounts that you don't recognize that could be harming your credit. If you spot something like that, you can file a dispute with the credit bureaus, but you may also spot some negative but accurate marks like mispayments. So those are things that you're not going to be able to dispute, but still keeping tabs on those and making plans to address them however you can is really important.

Sean Pyles:

And what will your credit report tell you about managing your credit? What clues can it give you about how you're doing?

Lauren Schwahn:

Basically, it gives you valuable insight into your relationship with credit. Your reports can show you how much you owe and to whom, which can be really handy if you're trying to wrangle your debt. And lenders will also check your report when you apply for new credit. So it can be helpful to see what they see first and then you'll better understand how you're positioned.

Sean Pyles:

All right, but credit reports are separate from your credit score. So let's ask the same questions for that. How do you check your credit score and what will it tell you about how you're managing credit?

Lauren Schwahn:

So you can check your credit score for free through certain banks and financial institutions and also trusted financial websites like NerdWallet, and credit scores will tell you how risky lenders think you are as a borrower. For example, if your number is on the lower side of the general 300 to 850 credit score range, that might signal that you don't have a long credit history or maybe you've missed payments. And on the flip side, a higher score often means you're more established, that you aren't using too much of your credit and things like that.

Sean Pyles:

So what are some easy ways to make sure that you are taking care of that score in 2024? Can you maybe talk about some difficult ones too? But let's start with the easy ones.

Lauren Schwahn:

If you're already making payments on time and keeping your credit utilization low, keep that up. That's super important. Remember, those are the two biggest factors that influence your credit scores. But if your credit utilization could be reduced, start by asking your issuer to increase your credit limit or ask a trustworthy loved one if they might be able to add you as an authorized user on their credit card account. And that's a relatively easy way you can accomplish that. Also, just watch those credit reports. It sometimes takes some effort, but even just a quick glance once in a while can help you stay on top of the issues that could come up and you can protect your score that way.

Sean Pyles:

Well, let's talk about the cost benefits of having a better credit score. If someone goes from let's say a 700 to a 750, how might that change what credit products, loan terms they might be able to access?

Lauren Schwahn:

Being in a higher credit score tier in this case, that's generally going from good to excellent, means you're more likely to get your credit applications approved because lenders see that you have a strong track record. And that can also mean better terms like being granted a higher credit limit or lower interest rate on a credit card. That could be the difference between a 15% APR versus a 22% APR.

Sean Pyles:

And that can make a bill a lot less expensive if you have that higher credit score.

Lauren Schwahn:

Exactly.

Sean Pyles:

Well, now let's pivot and talk specifically about how to deal with credit card debt. You've brushed up on what's in your credit report, you know your credit score, and maybe you realize that you have an issue with debt, maybe you're carrying a balance or maybe you've got some late payments on your record, maybe you're spending more than you should. What are some ways to get started on tackling these issues?

Lauren Schwahn:

With missed payments unfortunately, your options are pretty limited, but there are a couple things you can try. If you have a solid payment history and this is your first time missing a payment, you can try calling your credit card issuer and see if they'll remove it from your record. Sometimes companies can be forgiving, but that's not always a guarantee. You can also try writing something called a goodwill letter to the creditor, which is basically a note explaining why you missed your payment, maybe steps you've taken to correct the issue, and why they should delete the issue from your report. But most of the time for a late payment, all you can do is wait. So late payments stay on credit reports for about seven years, but the impact at least reduces over time. So you shouldn't see a huge hit to your credit report for that whole seven years.

Do your best to make up that late payment as soon as possible and stay on top of those due dates going forward. Things like setting reminders on your phone or setting up automatic payments can really help you pay on time. So that's how to manage late payments. But Sean, I know you've written a lot about debt and budgeting at NerdWallet. How do you think that folks can retool their finances if they find they're struggling to pay off credit card debt?

Sean Pyles:

Well, the first step is to know if it's an income or an expense problem, and all of this starts with understanding your budget. We like the 50, 30, 20 budget at NerdWallet where you put half of your monthly after-tax income toward needs. That's like housing, utilities, all of that stuff that you need to get by. 30% of your income goes to wants. And then 20% goes towards additional debt payments and savings. So for now we're going to focus on that 50% part.

Look at your billing statements over the past few months and see how much you're spending on the needs. Again, housing, utilities, minimum debt payments. Then look at your income. Is your income covering your needs? If it's not, you might have to make some tough decisions like figuring out how to earn more money or where you can cut costs, maybe even getting a roommate. But if your income is covering your needs and you find that you're slipping into debt or you can't pay off what you owe, you might want to dial in your wants spending. So you can avoid going deeper into debt for discretionary purchases like going out to eat or travel.

Lauren Schwahn:

But Sean, people do need to enjoy their lives a little bit. So how do you recommend people find that balance between spending money in the wants category but not spending too much?

Sean Pyles:

I'm all about enjoying life while we have it because tomorrow is not promised, but we want to find the balance of saving for tomorrow's goals while enjoying the present. So for those who are regular Smart Money listeners, I'm probably going to sound a little bit like a broken record, but I think savings buckets come in really handy when it comes to saving for your wants goals while also not overspending in this category. So this is a strategy where you have different savings accounts for different goals or spending categories. I'm a totally wackadoo person, so I have around 10 savings buckets for all of my different goals, like my wedding fund, my home repair fund. I also have one that's just a fund money slush fund basically. And I use this to save for travel and cover things like going out to eat. If I spend too much money from that account, then that's it for the pay period. I'm not going to dip into my home repair fund to cover a meal out.

Lauren Schwahn:

That's a really good tip.

Sean Pyles:

So Lauren, it's always important to pay attention to how you're managing your credit card debt, but even more so in this high interest rate environment, right? I mean every balance you carry means more money coming out of your pocket.

Lauren Schwahn:

Yes. And the fed rate climbed over 2023, and when that happens, that can affect the interest rate on consumer products like credit cards. So maybe your monthly payment and total interest rate will be higher, and then depending on the balance you carry and for how long that higher interest rate could mean you'll pay hundreds or even thousands more than you would've at a lower rate.

Sean Pyles:

But what if you just absolutely need to carry a balance right now? Can you share some best practices for managing that here at the start of the new year?

Lauren Schwahn:

Yes, and that definitely happens to a lot of folks. So first, be careful not to add to that balance if you can avoid it, because if you're piling on your debt, it can really quickly get out of hand. Something you can do is plug your balance and your credit card's annual percentage rate, which you might be able to find online or hidden in statement somewhere into a loan calculator online. And then that can help you estimate your monthly payment and just to get a better sense of how different payment schedules might impact the cost. You can also try, as we mentioned earlier, calling your credit card issuer and ask if they might be able to help you out. They might be able to lower your interest rate or waive fees, for example.

And then if you know you won't be able to pay off that balance for some time, you might consider a balance transfer. So you can apply for a credit card often with a 0% APR introductory offer, and then if you're approved, you can move the balance from your high interest credit card over to the new card and you'll save money as long as you pay it off before that introductory period ends.

Sean Pyles:

Eventually though, you're going to want to pay off that balance and hopefully keep it that way. Let's talk about a few ways that folks can chip away at credit card debt and get that balance to zero.

Lauren Schwahn:

So if you don't qualify for a balance transfer or you think maybe you could pay off the balance in just a few months, there's some other methods you can try. One is just make at least the minimum payment if possible to avoid late fees and penalties. And then you can throw any extra money you might have toward additional payments. Maybe that's a bonus you get from work, or maybe you pause your Netflix subscription for a while and you redirect that $20 a month toward your debt. But if you have multiple debts and not just one card, you can follow either the debt avalanche or the debt snowball method to pay off what you owe. We'll get into that in a second, but first you'll want to list out the balance and the interest rate for each account you have. The first method, debt avalanche, is where you would make at least the minimum payments on all your debts and you'd put any extra money you have toward the debt with the highest interest rate. Then once that debt's paid off, you move on to the next highest interest rate and so on.

Sean Pyles:

People like debt avalanche because it can be a cost-effective way to pay down your debt, and I'm all for saving money, but I do tend to be more a fan of the debt snowball method, which is similar to debt avalanche, but with this method, you focus on paying off your smallest debts first. When that debt is paid off, you roll the amount you're paying toward the next smallest debt, much like a snowball accumulating momentum rolling down the hill. And I prefer this method because when you're paying off these smaller balances, you get a rush of excitement and satisfaction that you're making progress on your debt because you see that one account now does have that zero balance, and that can be fantastic momentum to help people as they're paying off debt over a long period of time.

Lauren Schwahn:

It's like you said, those two methods, it can be really great if you know you're the logical person or you know you're the person who needs a quick reward that can help you choose between them. But if you're just kind of lost, if you're really struggling to make debt payments, then debt relief options like working with a nonprofit credit counseling agency on a debt management plan can also be worth exploring so that way you don't have to have it all on your shoulders.

Sean Pyles:

Right. Well, zooming out a little bit, what else should folks be on the lookout for this year that might impact their credit and debt life?

Lauren Schwahn:

One thing is that federal student loan payments recently resumed in October, 2023. Interest on those loans began accruing again in September. So for people who weren't making payments during that more than three year pause, having to budget for it again can be really tough. So the good news there is the Department of Education did establish this one year, what they're calling an on ramp period through the end of September, 2024, where missed payments won't count as delinquent and they won't be reported to the credit bureaus. So there's some protection for credit scores there, but the thing with that is that interest is still going to accrue during the period, and the amount you owe will go up if you're not making payments. So if you want to avoid a big balance and risking missed payments once those protections go away toward the end of the year, keep paying off those loans if you're able to, and that can keep your credit from taking a hit.

Sean Pyles:

The readjustment period to having this new or renewed loan payment in my budget is not fun. I'm sure a lot of people are experiencing the same thing, and I find that I'm still fine-tuning my monthly budget to account for my student loan payments. So if folks are also having a hard time sorting this all out, you are not alone. Lauren, do you have any final words of wisdom for those hoping to crack the credit code this year?

Lauren Schwahn:

Yes, just be as proactive as possible. Keeping an eye on your scores and reports and getting ahead of your bills will go a long way in protecting your credit.

Sean Pyles:

That's a great tip. I'll also add that folks should realize that their credit score isn't a reflection of their character. So if your score isn't where you want it to be, you are not a bad person or a financial failure. There are a lot of reasons that folks struggle with credit, but the steps that Lauren and I just talked about will help you get to where you want to be with your credit in 2024.

Lauren Schwahn:

So Sean, tell us what's coming in episode four of the series.

Sean Pyles:

Well, we are going to try to give folks some tips for how to manage the housing market this year, whether they are buying or selling.

Kate Wood:

Start or continue building your credit. Do whatever you can to make sure your on time payments, especially rent if at all possible, are making their way onto your credit reports. Request your credit reports because it's free to do and fix any issues or errors. Figure out how much house you might be able to afford starting from your budget.

Lauren Schwahn:

For now, that's all we have for this episode. Do you have a money question of your own? Turn to the Nerds and call or text us your questions at 901-730-6373. That's 901-730-NERD. You can also email us at [email protected]. Also visit nerdwallet.com/podcast for more info on this episode and remember to follow, rate, and review us wherever you're getting this podcast.

Sean Pyles:

This episode was produced by Tess Vigeland and Lauren. I helped with editing. Sheri Gordon helped with fact checking. Kayleigh Monahan mixed our audio, and a big thank you to NerdWallet's editors for all their help.

Lauren Schwahn:

And here's our brief disclaimer. We are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances.

Sean Pyles: