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A Good Credit Score vs. Good Financial Health: What’s the Difference?

April 28, 2014
Credit Cards
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Your credit score is a vital tool for understanding where you stand in the world of credit. You can have a fantastic credit score, which will make it easy for you to obtain credit cards and other kinds of loans at the most favorable rates.

Yet, that credit score may mean little in terms of you understanding the best ways for handling and improving your financial situation.

Take a big-picture look at your finances

There are many aspects to consider in a holistic view of your financial situation. On a macro level, you should create your own personal balance sheet that lists financial assets and liabilities. This will give you an idea of what debts you may need to pay off.

You’ll want to compare how much money you make in a year after taxes and compare it to how much you spend to see if you are spending too much and need to adjust your budget. Do you even have a budget? That’s a critical core element of the entire plan.

Other aspects of good financial health include at least a rudimentary plan of your financial goals? Is it to be debt-free? To buy a house? To save for college? What about retirement? If you have a good idea of what your goals are, and what your budget is, you can start to formulate a plan of action.

How to tackle your debt

Chances are, you will be initially focused on dealing with debt. It is difficult to move forward toward large-scale goals if you have debt that must be serviced each month and eventually paid off. This is where some analysis will be a big help, and bringing in a financial adviser or debt management expert may pay off.

Maybe you can pay off the debt in one fell swoop. Did you inherit money or get a bonus? Now would be a good time to use it to pay off the debt. The reason is that, unless you are carrying that debt on an introductory rate of 0% or so, you are probably paying between 11.99% and 22.99% in interest. It’s almost impossible to find an investment that can bring in that return, so you’ll want to reduce that money pit to zero. If you have multiple cards, pay off those with the highest interest rate. Another tactic is to transfer that balance to a 0% introductory rate card, which will save you a lot in interest payments.

You can use credit cards with lower rates to pay off the higher rate cards. The money you’ve saved in interest can then be applied to your outstanding balance. The next time you’re offered a lower rate credit card, read the conditions. If the new card’s credit limit is high enough to pay off the older, more expensive card, make the transfer.

Tools to paint your financial picture

There are so many aspects to a comprehensive picture of your financial health. There are some tools out there, like FlexScore, that can help contextualize it all. It takes a lot of time and patience, but it is rewarding and helpful for the long term.

Financial health image via Shutterstock