Tag: budgeting

Credit Card Habits During the Pandemic

Published in: Resources |

In our six-month reflection, we talked about how the pandemic has changed our spending behavior. For instance, we’ve noticed anecdotally that we’re spending less on travel and entertainment, understandably; instead, our discretionary income is increasingly going toward improving the creature comforts of our homes. Now, Money and Morning Consult’s new survey gives us insight into our credit card behavior with data.

Americans’ Credit Card Habits During the Pandemic

The good news is that over half of those surveyed said that they’ve put money toward a debt as a direct result of the pandemic, or plan to in the future.

But even though Americans are decreasing their balances, there’s a lot of anxiety around it; 25% of Americans said credit card debt is a source of daily stress. The high interest rates that credit cards carry is likely one of the main stressors.

With money worries on everyone’s minds, we wanted to answer common questions about credit cards: 

FAQ about Credit Cards

What is a common credit mistake?

A common mistake is relying too much on credit cards. It’s tempting to bridge any gaps between your income and expenses with a credit card. But because most cards have interest rates over 20%, if you aren’t able to pay off your balance in full every month, your debt can snowball out of control quickly.

How can people avoid relying on credit cards too much? 

If you’re on a tight budget, use them only for fixed, recurring expenses, and pay off the balance every month.

Doing this has a positive impact on the two most significant factors of your credit score: payment history and how much of your credit limit you utilize. This will get your credit into good shape should you eventually decide to buy a car or home, and won’t put you in danger of incurring a mountain of debt.

How can people recover from using their credit card too much? 

Seek credit counseling. Through close examination of your cash flow, credit card balances and interest rates, a counselor can help you identify the best strategy to handle your debt. Most credit counseling agencies are nonprofit organizations that offer free phone appointments. Find an agency near you by visiting www.nfcc.org/locator.

Can closing a credit card affect your credit score?

There are two reasons why closing your credit card can affect your credit standing.

First and foremost, one of the biggest factors on your credit score (second only to payment history) is your amount of available credit — in other words, how much you could spend until you hit your credit limit. And it’s good for your credit score to have a lot of available credit.

For example, if your credit limit is $10,000, and you typically keep your balance around $3,000, your available credit is around $7,000. If you were to pay off that balance, your available credit would increase to $10,000, and you might see your score slightly improve. However, if you close your card, you’d then be decreasing your available credit to $0 — and that will negatively impact your score.

Of course, the impact of closing one account also depends on the other open credit accounts you have. If you were to close a card that has a much lower limit compared to your other accounts, the impact on your score might be negligible. But there is another factor to consider: length of credit history. 

The age of your accounts is the next biggest factor on your credit score, and typically the longer the account history, the better it is for your score.

Let’s say you’re 50 years old, and you decide to close that old credit card that you opened back when you were 18. Unfortunately, your credit score is probably going to suffer as a result — even if you hadn’t used that card in several years — because it was one of your oldest accounts.

Keeping your credit cards open doesn’t mean you have to use them, of course. If your credit score is important to you, you can simply keep your unused credit cards somewhere safe and (more or less) forget about them. Some credit card companies may close the account if it’s been awhile since you’ve used it, so you may want to get in the habit of charging a small purchase to that card once or twice a year. But otherwise, you can stop using those cards and still benefit from the available credit they’re providing you with.

That said, your credit score isn’t everything. If the card comes with high annual fees, or if having lots of available credit makes you feel tempted to overspend, that open credit card probably does more harm than good. Closing the card might hurt your score temporarily, but in some situations, it could be better for your overall financial picture.

Financial Planning with The Humphreys Group

Want to learn more about credit card best practices? Check out Part 1 and Part 2 of our series from last year, “Mid-Year Wellness: The Credit Vs. Debit Debate.”

Gaining Control of Your Personal Finances in an Uncertain World

Published in: Resources |

Right now during this pandemic, many of us are feeling overwhelmed, stuck, powerless, out of our depth. We’re dealing with unprecedented levels of uncertainty during this COVID-19 crisis, and it can make us feel like we don’t have control over anything — at work, in our relationships, in life in general.

But we can make moves to gain more control in different facets of our lives — including our financial lives.

And one way to gain control of our financial lives is through tracking expenses and budgeting.

Expenses

Why Track Expenses?

The single most important thing you can do to improve your financial health is track your income and expenses. When we track our expenses, we become more aware of where our money goes. Are you underearning or overspending? Some of both? You can see if you’re working toward your goals or against them. Armed with this knowledge, you can make course corrections and feel more in control of your finances.

Tracking and categorizing your expenses can be tedious and daunting, so we encourage you to approach it with the mindset that it’s just data. Clarifying your income and expenses will give you the information you need to evaluate trade-offs, make informed decisions, and feel confident. There’s no secret sauce, but it all adds up to better financial outcomes.

How to Track?

Check your online bank statements — most provide expense summaries or a tracking function. You can also use an expense tracking app like Mint, You Need A Budget, or Tiller or just use paper and pen. The more frequently you check, the easier it is.

Consider dividing your expenses into categories:

  • Foundation Expenses: Expenses you can change eventually (e.g. rent/mortgage, utilities, groceries)
  • Discretionary Expenses: Expenses you can reduce quickly (e.g. concerts, movies, sports, dining out, clothes)
  • Intermittent Expenses: Expenses that don’t happen monthly; add these up and divide by 12 and set this amount aside each month in a separate account (e.g. car payments, home repairs, gifts, vacations)
  • Subsidized Expenses: Expenses that are paid by an outside source (e.g. software, work-from-home supplies, courses)

Set goals for each category so that you can monitor your progress.

Also, establish an emergency fund. We all know how medical bills and car repairs tend to happen when you least expect it. Saving for those expenses before they happen is vital to building your financial security. Borrow from this fund instead of using a credit card. Build this fund to equal more than 3 months of your Foundation Expenses.

Budgeting

Why Budget?

Budgeting allows you to make conscious choices about what is important to you — and then translate what’s important to you into measurable goals. Through budgeting, you can know if you can have it all, and if you can’t, identify trade-offs to make an informed, intentional, and conscious choice. Overall, budgeting lets you be in control of your financial life.

How to Budget?

First, find what budgeting system works best for you — whether it’s pen and paper, online worksheets, Excel, or budgeting apps. Start even if you don’t have all the answers. Schedule a time to revisit your budget and make changes as you learn more. Set short-term goals so you can celebrate your success.

Lastly, know that “done is better than perfect.” It is okay if you don’t have all the answers right away. At first you will be making estimates, but as you become more aware of your spending, you will be able to make adjustments.

Financial Planning with The Humphreys Group

During this COVID-19 crisis, there are still ways we can find control in our lives — whether it’s going for a walk without any distractions or taking a new class. With these tips on how to find control within your personal finances, we hope we’ve helped you find some peace of mind during these challenging times. Reach out to our team if you’d like to further discuss taking control of your finances and creating a financial road map to success.