Stay Out of Debt: Credit, Savings and Your Debt Plan

This is the last lesson. Getting out of debt is one half of the job, and staying out is the other. In this lesson you see how to protect your credit, build a cushion, look after yourself and put everything into one plan. This is general education, not financial advice, and rules differ by country.

What your credit score watches

Most credit scores are built mainly on two things: whether you pay on time, and how much of your credit limits you are using. Paying every bill on time matters most of all. In one widely used US scoring model, paying on time is about 35 percent of the score and the amount you owe is about 30 percent, though other models and countries weigh things differently. A credit score is a number that estimates how likely you are to repay on time. And checking your own score does not lower it.

A credit score dial pointing toward Good, labeled Your credit score. A pie chart has three slices labeled Paying on time, which is the biggest, How much of your limits you use, and Other things. A green-checked line says Checking your own score doesn't lower it. — Paying on time is the biggest slice. Checking your own score is safe.

Pay later is borrowing

Treat buy now, pay later plans as borrowing, because they are. Late payments can bring fees, and several small plans at once can quietly add up to a large monthly bill. In the drawn example, three plans of $40 a month become a $120 bill, and rising. Before you tap the button, ask yourself: would I buy this if I had to pay today?

A Pay later button with the warnings This is borrowing and Late payments can bring fees. Three plans of $40 a month each add up to a red box, Your monthly bill $120 and rising. A thought bubble asks Would I buy it if I had to pay today?, above a worried face. — Small plans stack into one big monthly bill.

Keep building the cushion

Once the expensive debt is gone, keep paying the same amount, but into savings. A first target is about one month of take-home pay. Then build towards three to six months of essential costs, which is a rule of thumb, not a law. Then the next surprise will not have to go on a card. This cushion is called an emergency fund.

A banknote labeled Your payment points by a dashed arrow to a coin jar labeled Into savings. A SURPRISE bill also points into the jar. Two ticked targets sit beside the jar: 1 month of take-home pay and 3 to 6 months of essentials. A card with a lock is marked Card stays locked. — The same payment, now going into savings, so a surprise stays off the card.

Look after yourself

Money worry and mental health are closely linked, in both directions. If worry about money is wearing you down for weeks, talk to a doctor as well as a debt adviser. And if you ever feel unsafe, or are in danger, call your local emergency number first.

Two boxes, Money worry and Mental health, joined by arrows pointing both ways. Below are a smiling doctor labeled A doctor, an adviser beside a Budget notebook labeled A debt adviser, and a phone labeled Your local emergency number. — A doctor, a debt adviser, and your local emergency number if you are unsafe.

If you are not safe, do not wait

If you feel in danger, or you are thinking about harming yourself, call your local emergency number now, or ask someone near you to. For worry that is not an emergency, a doctor and a free debt adviser are the right next calls.

Your debt plan

Here is your plan in six steps. List every debt. Find money in your budget, and pay priority bills first. Stop new debt with a starter fund. Pick the avalanche or the snowball, and pay a fixed amount above the minimums. Call lenders early, and get free advice if you need it. Then keep building your cushion.

Six numbered cards make up the debt plan: 1 List every debt, with a clipboard; 2 Find the money, with a wallet; 3 Stop new debt, with a jar; 4 Avalanche or snowball, with a rolling snowball; 5 Call lenders early, with a phone; 6 Build your cushion, with a fuller jar. — Six steps, from the list to the cushion.

YOUR TURN

Your Get Out of Debt plan

I listed every debt: who I owe, how much, the rate, the minimum and the due date
I found money in my budget, and I pay priority bills first
I started a small fund so the next surprise does not go on a card
I picked the avalanche or the snowball, and I pay a fixed amount above the minimums
I call lenders early if I am struggling, and I know where to get free advice
Once the expensive debt is gone, I keep paying the same amount into my savings cushion

Thank you for taking this course.

How Credit Scores Work: The Factors Behind the Number: what goes into a score and what helps it.
Emergency Fund Basics: What It’s For, How Big, and Where to Keep It: how to build a cushion that keeps a shock from becoming debt.
Money Anxiety: Why It Happens, How It Shows Up, and What Helps: how money worry and mental health affect each other, and who to call.
Buy Now, Pay Later Explained: How It Works and Where the Risks Hide: the late fees and stacked plans to watch for.