How would you rate your financial health?
Do you have a habit of checking your credit report on at least an annual basis? Well, this is more important than ever today, especially as identity theft continues to expand. Thankfully, it is easier than ever to perform this very important review. You can obtain a free credit report once annual through credit services such as freecreditreport.com or annualcreditreport.com or better yet, just by checking the website of your friendly credit bureaus. The big three are: Equifax (www.equifax.com); Experian (www.experian.com); and Trans-Union (www.transunion.com.) This free annual credit report will not generally have a credit score reflected, but will list all credit items reflected on your report. Getting your current credit score generally requires the payment of a small fee – well worth it, especially if you are planning to apply for a loan or other credit service. On these credit bureau web sites you are also able to get advice on understanding your credit report as well as improving your credit score. Understanding the contents of your credit report is vital for staying abreast of what potential creditors will be seeing if you apply for credit and also, to make sure YOU recognize everything being reflected in your credit report.
In addition to the regular review of your credit report, another important step in maintaining your financial health is to make sure you understand and manage healthy borrowing and spending habits. For the normal consumer, a total debt to income ratio – also known as a “back-end ratio”- should not exceed 36 to 39% of your gross monthly income. This ratio is determined by calculating the sum total of your monthly recurring debt payments, i.e. mortgage payment including tax and insurance escrows, car payments, credit cards, etc. and dividing that sum by your monthly gross income. (This is the debt ratio level which I have used to counsel customers and applicants alike for many years.) Although it is certainly possible to obtain credit at higher ratios, this range will generally enable the normal consumer to handle their debt and not be overly restricted or stressed as other expected or unexpected personal expenses occur – yes they do occur. This level of debt should also allow for a reasonable level of discretionary spending. Additionally, it is always a good idea to set aside a bit of your income monthly as savings. (A monthly savings amount can actually be considered as you calculate your total debt ratio.) It should come as no surprise that the surest way to achieve personal financial disaster is to continually spend more than you earn.
Obviously, the recommendations above require a measure of self-discipline – meaning to consider timing your purchases and/or borrowings in light of your debt to income ratio at any given time – balance is definitely in order. As you clear out older credit, that makes room for new credit. Please understand that there may be other considerations that may support minor deviations from time to time such as: stability of income level, job security, time on your job, level of savings in place, equity in your assets, discretionary spending habits, etc. Understanding all of the factors particular to your personal situation is very important and key to maintaining your financial peace of mind.
Another key aspect to managing your financial health is to develop a good business relationship with a personal banker or other financial professional.