Avoid Debt: Having Good Credit

Avoiding debt is possible but not always realistic when it comes to purchasing a house. The key then becomes ensuring that the debt you do incur is manageable based on your income. In order to keep any debt incurred as low as possible, you need the interest rate as low as possible. That is where your credit comes into play: the better the credit, the lower the interest rate you can get.

The first step in keeping your credit clean is knowing what your credit looks like. Everyone is entitled to a free credit report each year. Visit AnnualCreditReport.com or Credit.com to sign up for a free credit report. You will not receive your actual FICO score, but you will receive a comprehensive look at your credit history. To find out your FICO score, you can pay for that at MyFICO.com for about $15. Some of these sites also provide some advice on how to improve your credit from where it currently stands.

The primary way to ensure you have good credit is to pay off your debt on time. If you use a credit card, pay the full monthly balance before the due date each month. If you have a mortgage, make sure your monthly payments are made on time for the full amount. If you have a large purchase or payout to make coming up, use a budgeting strategy to save for it rather than borrowing more money for it. Excessive debt will hurt your credit rating as well as your financial foundation. The same strategies that can be used to pay down your debt will also help you increase your credit rating and, in turn, strengthen your financial foundation.

Financial Foundation Key #1: Avoid Debt

This sounds like a simple suggestion on the surface, but if you are already being swallowed by the jaws of debt, you probably find little solace in this advice. You have learned the hard way that debt can be all-consuming with interest that never sleeps or takes vacation.

First, for those who have no debt, you are among a small percentage of the population. Going into debt is necessary for the average person to purchase a house. Not many people have enough cash lying around to buy a house over the weekend. This debt is obviously permitted even if you want to live on a strong financial foundation. The keys to the debt incurred for a house purchase is to do your research on interest rates, keep a good credit rating, and ensure that your monthly payment will fit within your current budget. Many web sites offer mortgage payment calculators to assist with this, but don't forget to factor in your other monthly expenses when comparing to your monthly income. If your monthly mortgage payments exceed your monthly income when added to your other monthly living expenses, you may have to either reconsider your home purchase, or find a less expensive home. The days of a starter-home do not have to be a thing of the past.

Now, if you already have plenty of debt to share with others, you may need a plan to help you get out of it. Although this can seem overwhelming, one simple principle can be applied to eventually rid yourself of the stress of such a burden. A debt elimination calendar most effectively illustrates the idea. Using the example below, you can easily create a spreadsheet with a column for each debt in the elimination plan. The idea would be to put the debt carrying the highest interest rate on the left in order to pay it off first, while still meeting other debt payments. As the higher interest-carrying debt is paid off, additional cash is freed up each month to put toward the next debt column. Individual circumstances and timelines will obviously vary depending on your personal cash inflow and payment requirements. Another key is to pay as much as your cash inflow and budget allow, not just the minimum payment. For example, if you are able to pay off all credit card debt, which usually carries the highest interest rate, as you begin the program, you are making a good investment since you will save yourself all the money that would have been paid in interest in the future. Be sure that your debt elimination sheet is consistent with your income and budget.



I think this is a mindset that needs to be one of the keys to building a strong financial foundation. It's not a one-time get-out-of-debt-and-I'm-done solution, but rather is a frame of mind that has to continue whether we are deep in debt or not. Helping build that financial foundation will help you withstand any economic storm.

Keys to Building a Strong Financial Foundation in any Economy

Building a strong financial foundation for you and your family now and down the road isn't just built on making more money. There are five keys that need to permeate our thinking and drive our actions. Focusing on such principle-based keys help create the right frame of mind that changes our financial behavior. Only then can one truly build a strong financial foundation that can withstand any economic storm that comes our way.

Key 1: Avoid Debt
Key 2: Use a Budget
Key 3: Build a Reserve
Key 4: Give to Charity
Key 5: Teach Others

These may seem straight forward on the surface, but finding personal ways to apply these principles in their truest sense can take a long time to master. We will be diving into the details in the future to help us all build a strong financial foundation that can withstand any economic conditions.