Finding the Balance Between Credit and Debt

According to recent data on the state of credit, the average American holds a credit card balance of $5,910, and over 43.4% of U.S. consumers carry a balance on their cards instead of paying their bill in full every month.¹ What this tells us is that no one is immune to debt, and we need to understand how to address it.

Maintaining Good Credit

Your credit report and credit score can have a significant impact on your financial affairs, from your ability to obtain credit and secure competitive interest rates to your ability to get a mortgage or land a job:

Your credit report – As the name implies, this report contains information about your credit, including all past and present credit accounts, credit inquiries and late payments. Under federal law, you are eligible for a free credit report each year from all three credit reporting agencies. Be sure to review each report for accuracy.

Your credit score – A recognized standard for assessing credit risk, your credit score is based on a snapshot of your credit report at a particular point in time. It provides an objective measure of how likely you are to repay a loan and is used by lenders to help them make lending decisions. If you are looking for ways to improve your score, consider paying your bills on time, getting current on missed payments, keeping low credit card balances and paying off debt rather than moving it around.

Ultimately, establishing and maintaining good credit can potentially save you money and give you greater control over your finances. 

Managing Your Debt

Debt comes in many forms. If you’re like most people, you will accumulate some debt as you pursue your goals, such as buying a car, paying for school or purchasing a home. But remember, not all debt is created equal:

Good debt, such as a mortgage or student loan may  be used to build wealth and may also provide a tax benefit.

Bad debt, such as credit card debt, is used for depreciating assets and requires non-deductible interest payments.

If you are looking for ways to take control of your debt, you may want to consider pressing pause on any additional borrowing, using a debit card instead of a credit card, contributing more than the minimum payment toward your debt and repaying the debt with the highest interest rate first.

You may also be wondering whether it makes more sense to focus on paying down your debt or to save and invest your money instead. Here are some questions to ask yourself:

• Is the interest rate on the debt higher than the investment return you expect to receive?

 

• Does your employer offer matching contributions to your retirement plan?

 

• Do you have enough cash flow to avoid going deeper into debt if you choose to invest?

 

The Bottom Line

Good credit and debt management is about finding a healthy balance between the two without compromising on your long-term goals. A Financial Advisor can help you understand the big picture of your finances and connect you with the resources and strategies you need to maintain good credit, manage debt and take control of your financial future.

¹ CreditCards.com, "The average credit card balance is $ 5,910. Here’s what you need to know," 2023. Available here: https://www.creditcards.com/statistics/credit-card-debt-statistics-1276/(opens in a new tab).