As more apps for tracking credit scores have gained popularity, more people are focusing on raising their numbers. But one downside to having tunnel vision toward credit scores is that financial health depends on numerous additional factors.
A sole focus on improving scores can be a big let-down when you realize lenders want to see other indicators of strong finances. To help you stand the best chance of strengthening your overall financial health, we’ve put together this quick guide.
From debt settlement programs to savings accounts, you’ll learn what it takes to build the best financial future.
8 Reasons Why Credit Scores Aren’t Everything
Your financial health is made up of much more than just your credit score. For example, your debt-to-income ratio and savings are incredibly influential when trying to get approved for loans. Here are eight reasons why credit scores aren’t everything when it comes to financial health.
Credit scores are important, but building those scores demands financial stability. Paying your payments on time, keeping your balance under 50% of the limit on credit cards, and avoiding opening too many credit accounts too fast are all essentials for financial health. To make sure you’re able to adhere to these standards of stability, having an emergency savings account is a best practice to establish.
Another aspect of financial health is creating goals for spending habits with budgeted spending. To maintain a solid financial footing, there are few more valuable strategies than making a budget and sticking to it.
Avoiding unexpected expenses and impulse purchases will give you the best chances to build a strong financial future. And the best part is, adhering to a budget will lead to a higher credit score.
Stable Income Source
A good barometer of financial health is how easy it is to get approved for a loan. This means meeting the guidelines of lenders, and one of the primary guidelines used is the stability of income. Being employed full-time for at least a year could be considered the gold standard for most creditors.
But if you’re self-employed, they could ask for a longer track record. It all boils down to the stability of income. Some good examples of stability include consistent payments from an employer or key customer, contracts for future payments if you’re self-employed, or many years of tax returns for real estate investors.
Aside from your credit score, one of the leading indicators of financial health is your ratio of debt to income, sometimes called the “credit utilization ratio.” This can be calculated by adding all your debt payments, adding all your income, and dividing them.
The lower the percentage, the better. Ideally, you want to stick to a 30% credit utilization ratio, which is what many standard creditors use in their approval process.
Total Debt Burden
The total debt you have is another indicator of financial health that can be largely independent of your credit score. Even if you have a stable income and a good credit score, having large amounts of debt leaves you at risk for financial ruin.
When you have huge debt burdens, you’ll be paying more money to lenders, which means less that can be saved or used for investments. If you’ve found yourself falling deeper into debt, one option is a debt settlement program. This can help reduce your balance and monthly payments to an amount that’s manageable. Rather than opting for bankruptcy, a debt settlement helps you become debt-free without risking lower credit scores for ten years.
Credit Card Debt Balances
One of the worst types of debt to deal with is credit card debt. That’s because it’s structured as revolving debt, which means you could potentially pay interest on past interest charges. If you only pay the minimum payment, it could take up to 25 years to pay down your credit card balance because of this type of debt structure.
So, to help give yourself the best chances of a bright financial future, it’s best to limit your credit card debt. For those who’ve become burdened by high balances, trusted debt settlement companies like Alleviate Financial can ease the resulting financial stress.
Emergency savings are important for providing stability, but another important factor for financial health is retirement savings. This type of savings should never be touched, unlike emergency savings, which can be used to cover unexpected expenses.
Retirement savings will also build a more compelling case for getting approved for loans as well. Even with good credit scores, lenders still want to see signs of good financial habits, and saving for retirement is one of the primary indicators of this.
Balanced Credit Mix
A good credit score is important, but the mix of accounts on your credit report is important as well. Depending on the type of credit you’re trying to get, the type of accounts in your credit history could be an issue.
Maintaining a more balanced mix of credit accounts not only helps your ability to acquire more credit, it’s also a smart way to improve your financial health. That’s because credit card debt can result in compounding interest payments, while other debts like mortgages and auto loans are simple interest.
Having loads of compounding interest is financially detrimental, so mixing in more simple interest loans into your credit composition is ideal.
Start Improving Your Financial Health
When you’ve been caught in a downward spiral financially due to mounting unsecured debts, debt settlement programs can provide much-needed relief. Debt settlement can not only slash your monthly payments, it could potentially cut your credit card balances as well. This means more money you can put towards building a brighter financial future by paying down debt, saving for emergencies, and growing your retirement accounts for your needs later in life.
Whether debt consolidation, a balance transfer, or debt settlement is your best option, the debt experts at Alleviate Financial will help you get started. Call today to talk to our debt solutions specialists to start improving your financial health!