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How can you tell whether you’re on the right track to financial health?
To measure your physical health, you might consider weight, blood pressure, cholesterol levels and other numerical indicators. Likewise, you might be tempted to look at your salary or household income to give you some insight into your overall financial well-being.
Household income is only one piece of the puzzle. Many people can be deep in debt or live beyond their means, so a high salary might not indicate financial health at all. In fact, a quarter of households with an annual household income of $100,000 to $150,000 would not be able to produce $2,000 in one month to pay for an unexpected expense.
Your credit score and your financial health
Your credit score may be a strong indicator of your financial wellness.
In June 2017, Credit Sesame surveyed 1,018 members. They all had either very high credit scores (750 and higher) or very low credit scores (500 and lower). Credit Sesame asked how confident they felt about their money situation and if they were taking steps to improve their financial future, such as saving money for retirement, saving for their kids’ education and paying off debt.
The answers revealed major differences between how consumers with very high credit scores and those with very low scores handle and approach their money matters. The two groups also had contrasting financial outlooks.
Higher credit scores linked to greater savings
The survey revealed that people with very high credit scores are twice as likely to be actively saving for retirement and college. Plus, they are more likely to have a rainy-day fund and save for vacations as well.
The majority of high-score respondents (78%) contribute to a retirement savings account. Only 36% of respondents with low credit scores reported that they save for retirement.
Although the survey seemed to show that folks with very high credit scores tended to save more across the board, they still weren’t saving enough. Only 60% of consumers with very high credit scores save toward a rainy-day fund, and just 28% of those with very low credit scores squirrel away money for an emergency. A quarter of those with very high credit scores save for vacations, and just 11% of folks with very low credit scores do the same.
Where a college fund is concerned, consumers across the credit spectrum have room for improvement. Only 11% of those with very high credit scores and 6% of those with very low credit scores have started a college savings fund. We also found out that 10% of those with very low credit scores aren’t saving at all.
Higher credit scores linked to greater confidence in financial future
The survey confirms the general notion that those with higher credit scores have a more positive outlook on their financial future.
Among respondents with very low credit scores, only 4% of people feel extremely confident that they are saving enough, compared with 22% of those with very high credit scores.
More than half (53%) of those with very low credit scores feel “not at all confident” that they’re saving enough, compared with just 13% of those with very high credit scores.
Low credit scores linked to greater focus on paying off debt
The survey found that 53% of consumers with very low credit scores are focused on paying off debt and only 8% are focused on saving as much as possible for long- and short-term goals.
On the other hand, among people with very high credit scores, 29% are focused on paying off debt and 34% are focused on saving as much as possible.
Among the respondents with very low credit scores, 53% of those who are focused on paying off debt indicated they are “not at all confident” they’re saving enough, compared with only 22% of respondents with very high credit scores.
How to be financially healthy
No matter your situation, there are steps you can take toward improving your financial wellness:
Pay off debt - Make a list of your debts and create a game plan for paying them off. Two popular debt repayment methods are the debt snowball method and the debt avalanche method:
- With the debt snowball method , the goal is to make the biggest payment you can each month toward the debt with the lowest balance and the minimum payment on all your other debts. Once you pay off the debt with the lowest balance, you can move on to paying off the debt with the next-lowest balance. As you continue to pay off debts, the monthly payment to the target debt gets bigger and bigger.
- In the debt avalanche method , you start with the most expensive debt (the one with the highest interest rate) and follow the same steps.
- If you have outstanding debt in collections, pay them off as soon as possible or make a payment arrangement with the creditor.
Start saving - Even if you can only afford to save a little each month, try to start early. Establishing the habit of saving can be important to your financial health today and in the future.
Check your credit score - Check your credit score for free at CreditSesame.com. Along with your credit score, you can also explore actionable steps, tailored to you, to improve your credit health.
Jackie Lam is a personal finance writer who regularly writes for Credit Sesame and focuses on credit cards, debt, saving, budgeting, money, insurance, retirement, investing and loans.