Most of us have at least one or two bad habits when it comes to managing money. Whether it's a failure to stick to a budget or wasting money on purchases we don't need, these poor decisions can begin to stack up over time and may threaten our financial security.
A recent study by The Ascent highlighted some of the most common negative financial habits that keep people from realizing their financial goals. I discuss the top three in detail below. If any of these apply to you, consider making some changes.
1. Not paying all your bills on time
Your payment history is the single most important factor in determining your credit score, which in turn determines whether you qualify for loans or credit cards and what types of interest rates are available to you. A single late payment may not seem like a big deal, but it can drop an excellent credit score by more than 100 points, according to FICO data. The later the payment and the more late payments you have, the greater the hit to your credit score will be.
Late payments remain on your credit report for seven years, and if you apply for a new loan or line of credit during this time, you could be turned down or you may pay a higher interest rate to account for the increased risk in lending to you. This may tie up more of your cash, making it even more difficult to keep up with your monthly payments.
If you haven't already, create a budget that lists all your monthly bills and make these a priority first. You may have to cut back on discretionary purchases, like dining out, or work a little extra to make ends meet, but it's paramount that you pay all your bills on time each month. Set up automatic payments or reminders if you're forgetful. If you know a payment is going to be a little late, talk to the person or company you owe and ask them not to report the late payment to the credit bureau. They may agree if you're polite and you have a history of paying on time.
2. Letting your debts pile up
Some debt, like student loans, a mortgage, or a car payment, are pretty typical and aren't an issue if you can comfortably afford the payments each month. But other debts, specifically credit card debt, are problematic because the high-interest rates can cause your balance to balloon out of control. What may start out as a balance of just a few hundred dollars can quickly turn into several thousand within a few months.
It's difficult to get out from under this type of debt so you're not struggling to pay your other bills on time. A large credit card balance can also raise your debt-to-income ratio. This is the amount of money you have coming in each month compared to your monthly debt obligations. It's not a factor in your credit score, but it's something lenders often look at when deciding whether to work with you. A debt-to-income ratio greater than 43% -- that is, your monthly debt obligations cost more than 43% of the money you bring in each month -- will make it difficult to secure a loan.
Paying off debt is rarely easy, but it should be a priority if you have toxic debt. Do what you can to cut back on your monthly expenses or to increase your income, perhaps by starting a side hustle. Put the money you have leftover after paying your other bills toward debt repayment. You could also try transferring your debt balance to a card with a 0% introductory APR to make it easier to pay off. Or take out a personal loan to cover your credit card debt so you can have a more predictable monthly payment.
3. Not prioritizing saving
If you're carrying a lot of debt and you struggle to pay your bills on time, saving money for your future goals may not be possible at first. But as you get your debt under control, it's important to start setting money aside for your future.
Everyone should have an emergency fund containing at least three to six months' worth of living expenses. Life may throw you some curveballs, like a major home repair, a medical emergency, or a job loss, and your emergency fund can keep you from falling into debt when these unexpected expenses arise.
Long-term goals, like buying a home or retiring, also require substantial personal savings. If you're struggling to create a budget that allows for this or you're not sure how much you should be saving each month to hit your goal, consider consulting a financial advisor. He or she will be able to help you identify your goals and possibly invest some of your money to help it grow more quickly. Go with a fee-only advisor instead of one that's fee-based. Fee-based advisors earn commissions from leading clients to certain investments, which leads them to put their financial wellbeing ahead of the client's.
Correcting these three financial bad habits may take some time, but they're well worth the effort. Paying bills on time and minimizing your debt will help improve your credit score and help you avoid extra fees and interest charges while prioritizing savings will prevent you from falling back into debt in the future.