Understanding Your Credit Profile Can Improve Your Financial Health

For months, I had been trying to save money, and it just wasn’t working out. Of course I had this credit card to pay. If I just pay enough every month, it will help reduce my balance, right?

I looked at my credit card statement, and it stated that within the previous 12 months I had paid more than $1,000 in interest! That was nearly 20 percent of my debt balance at the time. 

While paying the minimum amount required is easy, it may not be your best option. The longer you take to pay off your debt, the more you’ll pay in added interest.

This is why it is so important to learn how credit works and understand your own credit history: any debts you have acquired with a fixed or revolving debt balance, debt details, and associated payment history. You can learn more about your credit history by reviewing your credit report.

Below are important considerations when understanding your credit:

  1. Compounding Interest: The same way your interest compounds on savings, it also compounds on your debt. The longer you allow a balance to remain on your credit cards, the more interest you pay over time.
  2. Interest Rate: Understanding the amount of interest you are paying on your debt directly impacts compounding on your account. The higher the APR + the higher your balance + the longer it takes for you to pay down your balance = greater interest over time. The stronger your credit worthiness, the more favorable your interest and loan terms. Keep in mind, if you have 15-20 percent interest on your credit cards and only pay the minimum balance or slightly more, it will take you significantly longer to pay down your debt. You will invest a lot more in interest on your debt than on the principal debt itself.
  3. Credit Score: Your credit score is an indicator to lenders of your credit worthiness. This score is driven by the information in your credit report. MyFICO.com is a helpful resource where you can learn how your credit score is calculated as well as track your score over time. Factors in calculating your credit score include your amount of debt compared to your amount of available credit as well as whether you pay your bills on time. Knowing more about your credit score can help you develop action plans towards managing your finances.
  4. Pay attention to detail: Pay attention to all your credit and billing statements to create a realistic understanding of where you stand financially. There are some great resources at MilitarySaves.org.

Developing a personal awareness regarding how you use credit and educating yourself on how it impacts your financial health are powerful steps toward building a road map to reach your financial goals.


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