Looking to rebuild your credit and improve your credit score? Focus on your underlying Financial Fitness first.
Quick loan. Fast loan. Payday loan. I do not care, I just need a loan…and I need it now. Or even better yesterday.
Does this sound like you?
Have you gotten yourself into a situation in which you need to borrow money now? Do you have an emergency? Did you lose track of your spending and end up short this month? Does this happen a lot? Do you worry every single month that you will not have enough money to cover your expenses through the next payday? Do you have multiple unsecured personal loans and three or four credit cards and do you juggle the borrowings each month among them to stay as current as you can? Do you choose which lender to pay each month as you can never pay all of them? Are you always looking for ways to save money fast?
Are you tired of this? There is a better way.
Would you rather “kick the can down the road”, take another short-term high interest loan and just get back to your daily routine? Or would you like to change? Are you ready to start?
If you are ready to start and if you have decided it is worth your time and effort then 118 118 Money is here to help you achieve Financial Fitness.
A BETTER WAY TO IMPROVE YOUR CREDIT SCORE: Be ACTIVE. Be SMART. TAKE CONTROL.
What does being Financially Fit really mean? It means being confident that you can afford what you need. It means being able to pay down some of your debts so that you can enjoy debt-free living in the future. It means building savings so you are prepared for what comes next. It means not living in constant panic. It means being able to relax.
Think about what you want. Create a picture in your mind. Visualise it (Yes, I said it. No, we are not moving into a cult-like scenario).
118 118 Money has vision. Our vision is “To champion financial fitness across Britain by offering products, resources, and support that empower everyone to take control of their financial health and create a better future.” You can also link to our Mission on our web site here. We are serious about Financial Fitness – and we can help. We can help you make smarter choices with your money. We can help you work toward lasting financial well-being.
Not everyone is ready to join us and let us help them start this financial journey. But maybe you are. Maybe you have had it. Maybe you are tired of going back to your “daily routine” and maybe you want to break out of this debt loop you find yourself in.
If the answer is that you are not ready now. If you are not in a place where you can make a change. Then stop reading here. Someday you will be. When you are, look for us.
But if you are ready, then let’s get moving.
118 118 Money has developed an “academy” to help you start your financial journey and guide you through to Financial Fitness. Our academy will provide you with financial health tools that will help you on this journey. We believe that you should find a financial partner who can help connect your financial choices to your life goals. When your financial decisions are aligned with your values, it is easier to make smart choices every day. Don’t just rely on some slick website with a few budgeting tips or some vague tools or loan calculators. It requires deliberate focus and practise to achieve money goals.
Related Podcast from 118 118 Money
Let’s talk about Financial Fitness. What does it really mean?
Let me give you an analogy. Becoming Financially Fit can be viewed a lot like trying to lose weight. What is the secret to weight loss? It’s simple but very hard to accomplish. Eat fewer calories than you burn each day.
Financial Fitness is the same. In very simple terms, it means Spending less than you Earn.
Of course that is the answer. Wow. Incredible. So easy. NOT. We know what you are thinking: “I do not earn enough”. “I already do not spend that much”. “I cannot control the bills – they just keep coming.” So stop. Breathe slowly. Humour us.
It is a long journey, but first, you need the tools. You need to understand what it means to take control of your finances. What it means to have good financial health.
It starts with a goal – a VISION. So, if you are still reading, then you have already taken the first step. Write down your goal. Put it somewhere you will see it everyday.
Next, it requires a PLAN for financial success. When you have a plan, then you are prepared for what comes next. You know what fits your plan and what does not fit. You know what not to do. You can restrain that impulse to spend on things that you might want but do not really need because you have a PLAN.
But let’s be clear. It is important to build a financial future on a solid foundation for the long-term. This foundation cannot be a quick fix. It needs to be built to last. It’s not about how to save money fast or take short cuts.
This shift in mindset can be empowering. You will begin to make conscious and deliberate choices with your spending. We call this being ACTIVE. You will also make sure that your spending choices align with your goals and your values. We call this being SMART. In these two ways, you will take control of your finances, become financially fit and stop just reacting to today’s latest crisis.
STOP OBSESSING OVER YOUR CREDIT SCORE
The first step in taking control is to understand that your credit score is an output not an input. Obsessing over your credit score several times a day and how to improve your credit score will not help you achieve Financial Fitness. In fact, it may cause more anxiety and lead to poor financial decisions.
Your credit score is not the CAUSE of your financial health. Your credit score merely represents your financial health at this moment in time. It represents how your past and current financial behaviours have shaped your credit file.
But do not confuse it with your financial health. To improve your financial health, you need to improve your underlying behaviours. Remember that. It is the financial habits beneath the credit score that really matter.
There are quite a few companies out there looking to facilitate your need to borrow. They can be called referral sites, price comparison sites or affiliate sites. You know the names to whom I am referring.
They focus you on your credit score. They may even give you an app which lets you look at your credit score every day – or even several times a day. They rank you and tell you the ranges of credit scores that each of the three Credit Reference Agencies use:
Experian (0 to 999):
- Excellent: 961 to 999
- Good: 881 to 960
- Fair: 721 to 880
- Poor: 561 to 720
- Very Poor: 0 to 560
TransUnion (0 to 710):
- Excellent: 628 to 710
- Good: 604 to 627
- Fair: 566 to 603
- Poor: 551 to 565
- Very Poor: 0 to 550
Equifax (0 to 1000):
- Excellent: 811–1,000
- Good: 671–810
- Fair: 531–670
- Poor: 439–530
- Very Poor: 0–438
Why? These companies argue that if you improve your credit score, then you will be able to borrow at a lower interest rate. But is that what you really should want? Is that your goal - to borrow at a better rate?
Maybe. Maybe not. Maybe what you want is to pay off debt or pay down some of your debt. Maybe you dream about debt-free living. Maybe you want to lower your borrowing slowly and methodically so that you can use that extra income for savings or buying things that matter to you rather than just paying monthly interest to your lenders.
Will watching your credit score help you do that? Not on its own.
Your credit score and your financial profile will not change much, if at all, by following the simple, limited actions recommended on most mobile apps.
What do I mean? Well, let’s look at the common advice these mobile apps provide.
Self-Serving Claims from Price Comparison sites
Limited Value Claim #1:
Use less credit. Yes, it is easy to recommend that to others. Almost every price comparison site says it. It sounds logical and is logical. But how do you actually use less credit. What is magically going to change your spending habits now that you have that advice. Sure, using less credit and staying below some arbitrary utilisation target (some say 30%, others say 50%) on your credit cards will help your credit score. Do you really think taking out a 7th or 8th or 9th credit card so that you can borrow what you need AND still stay below the utilisation target on all 9 cards is a long term solution? Do you really think the lenders won’t frown at that? The referral sites, price comparison site and brokers pretend they are looking out for you when they share this common wisdom. But you should recognise that if they do encourage you to take out more credit cards or loans then they benefit. Because every time you choose a credit card or loan from their list, they get some sort of commission or payment. If you do not select one of their listings then they do not get paid. And then what will cover the cost of providing this free website?
It could be deemed to be in their interest to have you, the consumer, take out 9 credit cards. Every time you take out a new credit card or loan on their site, they get paid. So sharing this common wisdom makes financial sense for them. But does it really make sense for you, the consumer. As we shared above, these sites only make money when consumers choose one the products on their lists. When that happens, the lender who provides you with that unsecured loan, credit card, secured loan or mortgage pays the site a fee or commission for presenting and selling their product to you. So the more products you take, the more money they make. Do you think Richard Branson has 9 credit cards? Unlikely. And wait for it. Once they get you to take a product from them, they add you to their email list. Then they send you more and more emails hoping to get you to switch from one product to another so they can get paid again. Sure you might lower your APR a bit, but they get paid each time you take a new product.
Limited Value Claim #2:
Be on the electoral (voter) roll. Yes, that will help you as lenders will view you as more stable than someone who is not on the electoral roll. But it is simple one-time action which everyone can take. It is easy. You should do it. But did it change how you spend your money or how you manage your personal finances or your income and your bills? No, it did not. So it is just a single action you should take. But it will not affect your long-term results.
Limited Value Claim #3:
Know which bills are reported to the Credit Reference Agencies (Transunion, Experian and Equifax). Yes, that sounds like it could help if you are short of cash and can pay only some bills each month. If not, why would it matter? Will it encourage you to pay those bills first so they are paid on time? Maybe. But good financial habits mean you should always pay all of your bills on time and always before they are due. Certain mobile apps highlight “your important bills”. Almost implying that you can “game” your credit score by paying these important bills if you have limited cash on hand. But, eventually, if you do not pay the other bills, then those merchants will chase you down. We do not want “quick fixes” or to pretend to improve your financial health. We want you to actually improve your financial health.
Limited Value Claim #4:
Do not have a County Court Judgement (CCJ) on your record. This will improve your credit score. Yes, again good advice. But if you have one, then you just need to wait until it falls off your credit report. And that takes a long time. In addition, a lot of us do not have one. And most of us do not plan to have one. So those companies that imply that in a pinch you should pay your “important” ones (those that report to the credit reference agencies) before the others are short-sighted. They are not helping you change your financial habits, they are just helping you cover up your issues for a short time. Let’s make a real plan that will change your behaviours and improve your financial health over the long term. This will help you not get a CCJ. But if you do have one, then Yes, paying it off will help lenders see that you have or are trying to rehabilitate your credit profile.
Limited Value Claim #5:
Keep your older accounts open. Yes, if you have an account that has been open for 3, 5 or 10 years, then it makes you seem more stable to lenders (assuming you have made the payments on time for that whole time). So do not close it. Valuable advice. But what action can you take beyond just keeping the account open. How does this help you improve your financial fitness? It really doesn’t.
Limited Value Claim #6:
Do not open a lot of new borrowing accounts. Searching for credit and opening a lot of new credit accounts makes lenders think you are “hungry” for credit. Well, of course, you are hungry for credit or you would not be borrowing. This is why the industry came up with QuickCheck. A way to search for credit without having it go on your permanent record. In fact, these soft searches for credit are a “gimmick” to make it seem like you do not need credit. So until you actually take the loan or credit card, other lenders will not know you have even looked around for more credit. Just like all the others, this advice is not really advice, but more a way to “game the system” so you can keep borrowing. The whole system is set up to enable you to just take the next loan and go back to your daily routine.
Limited Value Claim #7:
Do not have an IVA. An IVA would negatively affect your credit score. Duh. A bit late for that. If you have gotten so far into debt that you need an IVA, this advice is not going to help. You needed someone to help you improve your financial habits well before you need to contemplate an IVA.
FIND A FINANCIAL PARTNER. DON’T JUST PICK A PRODUCT
The price comparison sites work to make you focus on your credit score, then they give you offers based on whether you will be accepted and how much you can borrow and at what APR.
Let’s start with what is an APR. The APR (Annual Percentage Rate) is the total annual cost of borrowing, expressed as a percentage, which includes both the interest rate and any additional fees or charges associated with the loan. It reflects the total cost of credit to the borrower over the loan amount, making it easier to compare different loan offers.
The price comparison site or referral sites primarily rank lenders by the APR that they are willing to offer. To borrowers, this seems logical and they generally choose the lender at the top of the list. And why not. They do have the lowest APR. Look it says it right there.
Customers do the same thing for car insurance. Most people have been trained by their favourite price comparison site to choose the car insurance provider with the lowest premium. And they tend to believe that switching providers each year will get them the best price. Now that makes sense if you are looking to pay the least. But most people buying car insurance do it for one of two reasons.
The first reason is that the law is that you need insurance to drive on the roads. So pay as little as possible and check that box.
The second reason is that you may need or want the insurance. In this case, you should have a different goal. You need to choose a provider who will still be in business in case you have an accident and need them to pay the claim and not hide behind the fine print in the contract. When you are shopping for car insurance make sure to consider not just the price of the premium but also make sure you only compare providers who will actually be there to pay the claim if you get into an accident.
The same purchase decision happens whenever we rent a car. At the rental counter, the agent is trained to explain to us how much it will cost if we do have an accident. Is this for our benefit? Maybe. But, more likely, it is a way to encourage us to purchase car rental insurance. Some of us just rent and skip the insurance. YOLO everyone. The rest of us buy the insurance. For those of us who know we will buy insurance, the online travel sites have begun to offer us the opportunity to buy it online when you rent your car from them. This insurance is always cheaper than the insurance cost at the rental counter. So we have a decision to make. Pay less and buy it online. Its cheaper so why not. Maybe, its just us. But we never buy car rental insurance online. Why not? We worry about the hassle if we do have an accident. We worry that we may have to pay the rental car company the damage fee before we get the claim paid. We also worry that it will be a big hassle to get the claim paid as we will need to take pictures, file forms, send emails and make phone calls. Sure, we may never have an accident. If that is the case, then we lose money each time we rent and buy the car rental insurance at the counter. But if we do have an accident, then we will not ruin our vacation memories. We will just hand the keys to the rental car company, leave the damaged car behind, walk away and never look back.
Why am I talking about car insurance? Because consumers generally use the same thought process when choosing a lender.
What do you want in a lender? Most people (if you remember the title of this article) just want the cash NOW. If that is your goal, then you should choose the cheapest lender. It’s just a loan. Money is a commodity. So why care who lends it to you.
On the other hand, if you borrow money and want to borrow more or want to talk to your lender or need help from that lender, would you not want to evaluate who that lender is and how they will treat you and how they have treated others? Maybe your lender will actually care about helping you become financially fit. Maybe that lender will want to build a relationship with you so it can serve your needs not just today, but also tomorrow. Maybe not. Maybe every other lender on the panel just wants you to know that their vision is “simple personal loans” or “flexible personal loans” or “money in your account in 2 hours”. Most of them use phrases like “save money fast”, “get out of debt fast”, “master your money today”. But these slogans are designed to make you think that it is fast and easy to become financially fit. We know it is not. Lasting change requires effort.
If you want a partner, then maybe that is worth more.
How much more? I do not know. Only you can decide that. But the affiliate sites want you to make a decision to choose one lender who offers a 39.8% APR over another lender who offers a 39.9% APR. It looks better. It is better.
But have you ever quantified what that 0.1% is worth to you?
With an APR of 39.9% on a £2,000 loan over 24 months, the total amount of interest is £934.42. This is slightly higher than the total cost at a 39.8% APR, which would be £931.83 in interest. Based on my calculations, the difference would be £2.59. Is that worth choosing a worse lender for that? Certainly not in my mind.
So how much is it worth? Does a 5% difference in APR make it too much? Maybe. If you compare a 44.9% rate against the above 39.9% rate on the same 24 month £2,000 loan, the total repayable would be £3065.46 at 44.9% as compared to £2934.42 at 39.9%. The difference comes from the interest charge of £1,065.46 as compared to an interest charge of £934.42 – so £131.04 more interest on the 5% higher APR of 44.9%. That is a lot over two years.
Is it too much to pay to get a Financial Partner? You decide. But Be ACTIVE. Be SMART.
Think about what you want. Don’t just let the price comparison sites and their marketing messages lead you around. Research the lenders making the offers. Some have been around for a long time and are rooted in the market. Others just want to make fast profit off you, the customer. Will they be there when you need them? 118 118 Money has been around since 2013.
So ranking the loans by lowest APR is a good idea. But be clear what the actual cost difference is and make sure you think about your choice of a lender on more than just their APR. What you are willing to pay to get a strong lender who could be supportive of you as you grow. Ask yourself, is price the only criteria that matters to you? Do you value anything beyond price?
118 118 MONEY IS A DIFFERENT DIRECT LENDER
Our recommendation is that to improve your financial health, you will need to have a plan and then execute on this plan. With a plan, you will have a way to measure your progress and understand which changes are easy and which are hard. 118 118 Money is there to help you with this.
How should you improve your financial fitness?
Spend only what you Earn.
Pay your bills on time – every time.
Never default on a debt. Even if the merchant was rude. It hurts your credit profile and does not really affect the merchant. So hold your head up high and immediately speak to the merchant about the bill. If you believe the product was flawed or the service was poor, discuss it with the merchant. The law is on your side if you can prove your claim. But do not ignore that bill – that is the worst thing you can do. If you stand firm on your principles or emotions and do not talk to the merchant, then your debt becomes a long-term problem for you and your credit profile. It is easier to face the merchant now (even if, in the end, you need to pay) than to live with the consequences of not paying this bill and having it remain on your credit record. Think about your approach. Be firm, but discuss it with the merchant.
Maybe you could act on the third one. But the first two, while seemingly simple, are very hard to accomplish. So lets get to the PLAN.
REBUIILD YOUR CREDIT - FINANCIAL FITNESS IS A WAY OF LIFE
To be Financially Fit is to make SMART, ACTIVE choices. The word Fitness is there to imply ACTIVE. But for it to work, it needs to become a daily routine. Be SMART – do not waste money and do not let others take advantage of you.
As you will see when we get to managing your Expenses, Financial Fitness is not about being cheap or depriving yourself. It is about being SMART. It is not about how much money you have. It is about learning how to manage your personal finances and your money. It is about building smart money habits. It is about working hard to build a financial future based on these smart money habits. Did you know most people who win the lottery go bankrupt. How can that be? Well, they did not learn how to manage their money and so when they got some, they spent it, wasted it or lost it all. There is no stigma to being Financially Fit.
CREDIT SCORE HEALTH SELF-ASSESSMENT
The first step to becoming financially fit is to understand where we are starting. In other words, what is our baseline. From these, we can work on plan to help us address any issues we have.
Let’s think of this as a self-assessment.
To help explain this process, let’s look at someone’s financial position. This will help us think about and then manage our own financial life. I will use, as an example, a fictional customer (let’s call him Robby) who has had difficulty paying down debt and building savings.
For simplicity (and because we love marketing and we are 118 118 Money), we have developed two views: MoneySnapShot and MoneyFlow.
Your MoneySnapShot is a picture of your last 12 months of income, expenses, borrowings and savings. At a very high level this will show us if you are spending more than you earn.
Your MoneyFlow is just what is says – the flow of money into and out of your accounts. This flow should be regular and predictable.
MoneyFlow will help you take control of your finances and improve your financial health. With your help, we will use your past income and expense flows to anticipate and forecast what is going to happen in the next 30 days and help you prepare for it.
- MoneyFlows into your accounts – that comes from your EARNINGS
- MoneyFlows out of your accounts – Generally due to SPENDING (Expenses & Debt Repayments) and TRANSFERS.
The overall MoneyFlow (when you add what flows in and then subtract what flows out) will allow you to watch your cash and predict how much cash will be left over each month to pay down additional debt, spend on fun things at any given time or build a small nest egg in a savings account.
Understanding your MoneyFlow is crucial to achieving Financial Fitness.
Your MoneySnapShot will look back over the last month, 6 months and 12 months and show where your EARNINGS, SPENDING and your TRANSFERS are going. Then we will use the MoneyFlow to suggest ways to prepare for your upcoming expenses and bring your spending into balance with your income each and every month.
Note: Another confusing thing in finance are the terms CREDIT and DEBIT. When referring to your current account or savings account, a Credit is when money flows into your account. A DEBIT is when money flows out of your account. So Income is a Credit and Expenses are a Debit.
How can you remember this? A simple way I remember this is by thinking Cash Coming into my account is a Credit, while a Debit Dumps cash out of my account. You get it right? Alliteration. Cash-Coming-Credit --- Debit-Dumps cash out…
INFLOWS
MoneyFlow into your account is a Credit which is paid as your Salary, Wages, Other income (overtime or bonus), and Benefits in return for working.
While you may see Credits into your account for returned purchases or refund, these are really just offsets to Spending and so will not be counted by Lenders as consistent recurring income. We will discuss these later on.
So let’s begin looking at our fictional customer Robby. Robby earned Salary/Wages of 3,000.00 in September 2023.
On its own, that fact does not tell us much. We need context. We need to know if his income of 3,000.00 a month is stable and consistent. We need to understand if he has any gaps in his income to understand if he has held a job consistently.
To answer these questions, we have provided a simple MoneySnapShot of Robby’s last 12 months of INFLOWS in Table 1 below.
Table 1 below shows that Robby actually earned 30,000.00 in Salary/Wages in the 12 months ending September 2023. He also received Benefits, Other Income and some Interest income.
Looking closely at his total inflows, we see that he has MoneyFlow into his account in total of 42,000.00. While most lenders will only look at his recurring or sustainable income which would be that classified as his Salary/Wages and Benefits, he does enjoy the ability to spend his other income.
When you look at this table, what stands out?
Table 1
Robby earns on average 2,500.00 a month in Salary/Wages over this 12 month period. As we examine his income over these last 12 months, we see that his earnings vary from month to month. This will make it hard for him to plan his spending unless he limits his monthly spending based on this average 2500.00 earnings amount. We also notice that he does not have any Salary/Wages coming in during March 2023.
Why might this have happened?
If he is self-employed then it might be a “dry spell”. When you are self-employed there are times when work is scarce. For these times, you need to have savings. In this case, Robby needs to have savings equal to his normal monthly income. Otherwise, a “dry spell” that happens once a year or once in a while could put his financial plans for his family at risk.
In addition to his Salary/Wages, Robby’s inflows include a column labelled “Other income”. This could be from a second job or overtime or a bonus. Based on this, it might be that Robby received a bonus in March 2023 and that his bonus included his Salary/Wages for March 2023. This seems unlikely as employers know that lenders like to see stable income, so they would not normally reclassify his Salary/Wages from that category to a different category of income. If his employer did make this re-classification for only one month, it would be more difficult for Robby to demonstrate stable income to a lender. If you find that your employer has shifted your Salary/Wages to “Other income” on your paycheck, you should ask why they did that. For this reason, we recommend that you look carefully as each paycheck stub.
Another reason might be that Robby was furloughed for the month. Or it could be that Robby quit his job (or was let go) and could not find another job fast enough. Financial Fitness means having a job and earning wages every month but, in some cases, things are unavoidable.
It is very important to keep the money coming in. The best way to get Financially Fit is to keep your job. Even if you do not like it. Even if you do not like your boss. Never quit your current job until you have found a new job. Lenders like someone who has had the same job for a long time. It is even better if they see that you have been given increased pay during your tenure with the same company. Both of these attributes demonstrate stability. So how can you achieve this? Look for ways to help at work. Understand how you can contribute to the company’s success and look for ways to take on more work so you are in line to get promoted. Try to make yourself indispensable at work. Look for overtime opportunities. These bring in more cash and demonstrate that you are willing to help out when needed at work.
The next thing to notice in these MoneyFlows is that Robby gets Benefits. These benefits are recurring each month and so would count when a lender looks at his income. However, lenders like to see that benefits are only a small portion of an applicants monthly income. In this case, Robby gets only 6.2% (1,986.00 / 31,986.00) of his income from Benefits and so would likely not raise any red flags with lenders. We exclude his one-off Bonus payment as some lenders might not count that as recurring income. This is an important distinction. When applying to borrow, the only inflows that likely count will be those that are consistently flowing into your account each and every month.
MoneySnapShot helps you understand your CREDITS or incomings. Robby has a good income. There is a question mark in March 2023 as it looks like a one-off non-recurring inflow. But he earns 30,000 plus benefits – so we would not expect that he is having any financial challenges.
Remember, Financial Fitness means SPENDING less than you EARN.
And Robby earns a lot.
OUTFLOWS
Let’s look at his OUTFLOWS (Table 2 below). First, just look at the line for September 2023. The MoneyFlow out in September 2023 is 3,212.10.
Table 2
This is comprised of his Expenses, his Debt Payments and his Transfers.
INFLOWS - OUTFLOWS
In Table 3 just below, we compare his INFLOWS from Table 1 to his OUTFLOWS from Table 2 and we can see that when we subtract his OUTFLOWS from his INFLOWS that he has run a Deficit in September 2023 of (39.35). We also notice that he transferred cash into his account in the amount of 692.90 as well.
Table 3
So in reality, Robby actually had 732.25 (the sum of 692.90 and 39.35) more cash flowing OUT of his Current Account than he had flowing IN to his Current Account in September 2023. If that has been going on for each of the last 12 months, then Robby’s MoneyFlow is negative and he needs a plan. But let’s look.
If we do the same exercise using the figures for the last 12 months, we can see the result.
Table 4
Robby has Transferred 4,785.15 into his Current Account from another of his accounts or perhaps from additional borrowing. But even after additional cash comes in from those transfers, he still shows a Deficit of (6,905.85). Meaning that during the last 12 months, Robby’s overall MoneyFlow, in this example, is showing an OUTFLOW of (11,691.00). So more money is going out of his account than coming in.
Is his financial situation as bleak as it seems? In reality, it is not. But we do not know that at this point in our story. At this point, things do look bleak for Robby. So lets dig deeper.
Looking at Table 2, we can see his Debt Payments are quite high relative to his income. So lets start there. In Table 5, we break out his Debt Payments.
Table 5
We can see his credit card payments are most of his Debt Payments. We have also highlighted in Yellow four payments that seem quite high. Rather than making minimum payments on his Credit Card, Robby seems to be trying to pay off debt faster. He is making large payments periodically over the last 12 months which add up to 13,310.00. Using his average monthly debt payment during the other 8 months of the year, we can estimate that he has managed to pay off debt on his credit card in the amount of over the last 12 months.
Our MoneySnapShot would then show that instead of having a cash Deficit of (11,691.00) as we thought above after reviewing Table 4, Robby has actually used that cash to pay down 11,020.00 of credit card debt. So he now would only have a cash Deficit of (671.00).
But we stopped a bit early. Reviewing Table 5 again, we see that he made a large Buy Now Pay Later (BNPL) payment as well in April 2023. Interestingly, this is after he got that large “Other Income” payment in March 2023. So, while it is possible that he went on a shopping spree that month, it is also possible that he used his extra cash to pay down some of his BNPL outstanding debt. If he did this, then his apparent Deficit of (671.00) would actually have been a surplus of 1,129.00 for the last 12 months.
While we do not know what actually happened. It is possible that Robby is making good decisions and executing on a plan to consistently reduce his debt on his journey to achieving Financial Fitness.
Note: In general, the interest rate on BNPL debts is lower than the interest rate on credit cards, so I would ask Robby (if I could speak to a fictional customer) whether he considered that before making that 1,800 payment on his BNPL rather than just using that same money to pay down more of his credit card debt.
The Plan
Now that you have a good grounding in how MoneySnapShot can help look at your financial history, let’s actively think about how we can manage personal finances and manage our daily financial lives.
The best way to achieve Financial Fitness (yes, I want to say MoneyFitness – sure I do. So do the 118 boys, but I won’t) is to anticipate your required expenses, understand when your Salary/Wages are paid and control your expenses (both how much you spend and when you spend) so that your MoneyFlow is predictable and your accounts always remain in positive balance territory. This is better than just getting some budgeting tips from different web sites.
It may not be possible to achieve this objective immediately. But that is the definition of Financial Fitness. Start small. Take little steps forward every day. Our 118 118 Money Fitness Academy can help. Use our tools to gain a deeper understanding of your finances. Learn how lenders look at you. Learn ways to make daily decisions on how to allocate your income. Learn how to think about your spending on things you need as opposed to things you want.
To take advantage of our tools and our academy, read all our articles. Manually use our tools to look at your MoneySnapShot or forecast your MoneyFlow. Even better, securely link your open banking accounts to us and let us show you how to move forward faster on your journey to Financial Fitness.
Once you link your accounts to us, we can quickly show you a MoneySnapShot of your last 12 months. You can then help us optimise a MoneyFlow forecast to help you manage your finances.
When you link your credit reports to the 118 118 Money mobile app we can then add in a tool to help you plan how to pay down your debts and manage your expenses in ways that will help you achieve long-term financial fitness.
We will also look at your borrowings and find offers that can save you money and payoff your borrowings faster. After all that, then you will likely see your credit score increase. But not because you watched it daily. Instead it will rise because:
- You are SPENDING less than you EARN.
- You are paying your bills on time or early
- You are repaying your debt faster
- You are saving money where you can
- You are becoming Financially Fit
We have also developed almost 150 ways to help you save money on a daily basis. We outline and share these money management tips and ways to change your behaviour so that you naturally begin to save money in our Fitness Academy articles. Each of these articles will walk you through an area where our team of real people like you have thought about how they behave and how they have worked on their financial fitness.
That is your Plan. Use MoneySnapShot to understand what you have done in the past. Evaluate options for where you might make small changes to your spending and so that you can balance your income and expenses each month.
Then examine all of your daily decisions and work on being ACTIVE and SMART. You can have fun while also be managing your finances and becoming Financially Fit.