Money Management

Aim to avoid these at all costs. 

There’s a reason consumers are frequently drawn to personal loans. A personal loan lets you borrow money for any purpose, whereas other loan types tend to restrict you to a specific purchase. A mortgage, for example, can only be used to finance the purchase of a home.

As of the end of 2022, U.S. consumers had a collective $222 billion in personal loan debt, according to data from TransUnion. But before you add to that number by applying for a personal loan, keep these big mistakes on your radar — and do what you can to avoid them at all costs.

1. Borrowing more than you need

Interest rates are up these days on many different loan products. The reason? The Federal Reserve has been raising interest rates in an effort to cool inflation. And while the Fed doesn’t set consumer interest rates directly (it oversees the federal funds rate, which banks charge each other for short-term borrowing), when it raises its benchmark interest rate, consumer borrowing costs tend to climb.

Since it’s more expensive to take out a personal loan these days, it pays to keep the amount you borrow to a minimum. If you’re trying to fix up your car and you’ve been given an estimate of $4,200, don’t borrow $6,500. Instead, look at borrowing $4,500 or even $5,000 to give yourself a modest buffer without going overboard.

2. Borrowing when your credit is poor

If you’re taking out a personal loan to cover an emergency expense, then you may not be able to put off your loan application. But if you’re borrowing to do something like renovate your home, then it pays to hold off on a personal loan if your credit score could use work.

Personal loans are unsecured, so the lower your credit score, the higher an interest rate you’re likely to end up with on a personal loan. And since loan rates are up in general right now, you don’t want to add to that pain.

One way to potentially boost your credit score pretty quickly is to review your credit report for errors. Correcting a mistake could result in a nice lift to your credit score. You can also raise your credit score by paying all of your bills on time. But that’s more of a process, and it might take longer to get results.

3. Not shopping around

While borrowing has generally gotten more expensive, ultimately, each lender sets its own rate when it comes to personal loans. And it’s important to do some rate shopping before signing a loan agreement. If you go with the first lender who approves your application, you could end up getting stuck with a higher interest rate on your loan — and higher monthly payments to go along with it.

You may have your reasons for taking out a personal loan at a time when rates are high. But keep these points in mind if this is a road you’re considering going down.

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Could you earn a score above 800 by trying my techniques? 

Credit scores are created based on a record of past borrowing behavior, and they range from 300 to 850.

My credit score is currently 807, which is considered to be excellent credit. While this score fluctuates over time (it’s actually down 12 points because I temporarily charged a lot on a credit card), my score has been above 800 for a while.

It took me some time and effort to earn great credit, but here’s how I did it.

I set up autopay on all of my credit cards

One of the single most important things I did to earn good credit is to set up autopayments for every credit card and loan I have. I arranged for my payments to come directly out of my bank account to ensure I never miss one.

This was really important to me because I was accidentally late on paying a credit card in college when I lost track of the due date. This hurt my score for years, and I never wanted it to happen again. I not only have autopay now, but also a calendar reminder to check after my payment was supposed to have been made so I don’t risk a black mark on my report that drags my score down again.

Since payment history is the most important factor in determining a credit score, this step alone made a huge impact in helping me earn great credit.

I regularly requested credit line increases

Credit utilization ratio also plays a crucial role in the credit scoring formula. This is the second most important factor after on-time payments. It refers to the percent of credit used relative to what is available.

I charge absolutely everything on my cards so I regularly run up large balances. While I pay my cards off in full each month, sometimes my card issuers report my balance before it’s been paid down. As a result, this was hurting my utilization ratio because it looked like I was using a lot of my available credit.

To solve this problem, I request credit line increases every chance I get. I sign into my online accounts all the time, and whenever the option appears to request an increased credit line, I take that opportunity. As a result, I have one credit card with $95,000 in available credit and several others with large credit lines as well.

Since my credit limits are so high, it is very rare that I come close to exceeding the recommended 30% credit utilization ratio. In most months, I’m well below it (although, I did charge a large purchase prior to this article, which is why my score is down 12 points).

I took out a mix of different kinds of loans

Finally, I’ve made it a point to get a good mix of different kinds of loans on my credit report, as type of credit is also a factor in the scoring formula. I have a mortgage and several credit cards, but I also temporarily took out a car loan a few years ago which I paid off within three months — just for the purpose of getting this added boost to my credit.

Taking out a loan solely to raise your credit score may not seem worth it, but I knew I’d be applying for a mortgage soon and I wanted to have the highest score possible before I did that, so it was worth paying a few months of interest at a low rate.

Each of these steps have helped me earn a great credit score, and I’ll continue using these techniques to keep my score high for the foreseeable future.

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It really saved us one year when my income took a large dip. 

If you’re like many people, housing is probably your single largest monthly expense. In fact, the national median mortgage payment was $1,964 in December 2022, according to the Mortgage Bankers Association.

Of course, your specific mortgage payment may be higher or lower. But it’s important to take on a mortgage payment you can comfortably afford. That’s something my husband and I made a point to do. And it really came in handy one year when my income took a notable hit.

Why paying the mortgage on one salary makes sense

When my husband and I bought our home, mortgage rates were fairly low. But even so, we decided to push ourselves to make a large down payment on our home, and to stick to buying a home that wasn’t all the way at the top of our price range.

In fact, in the course of buying our home, my husband and I decided that we needed to be able to cover our mortgage payment on his salary alone. The logic was that my freelance income was variable, and we wanted flexibility since having kids was part of our plans. In the end, that decision actually saved us a world of financial upheaval.

A choice that really paid off

My husband and I bought our home before having kids. When I had my son a few years later, I was able to continue working full-time, even though it meant losing a large chunk of my income to daycare costs.

When I had twin daughters a few years later, daycare wasn’t an option. The cost of putting all of my kids into daycare at the same time was so exorbitant that it wouldn’t have been worth it. Instead, I decided to cut back on working for the first year of my daughters’ lives. Between constant feedings and diaper changes, there was barely enough time to give my son the attention he needed as a toddler, let alone sit at my desk writing. And so all told, my income took a massive hit that year, shrinking somewhere in the ballpark of 80% to 90%.

Thankfully, that wasn’t a problem from a mortgage perspective. Because we made sure we could cover our mortgage, as well as our other essential bills, on just my husband’s salary, we never had to worry about falling behind on our housing payments while I was largely out of work caring for my children.

We did have to cut back on non-essential spending that year due to my lack of earnings. But at least we knew our essential needs were covered.

How much flexibility do you want?

You never know when you or your partner might need to opt out of the workforce for a period of time. It could be due to expanding your family or another reason — even burnout.

If you make a point to borrow conservatively for a home and take out a mortgage a single salary can cover, you buy yourself that much more flexibility. In our situation, knowing my husband’s income could fully cover our mortgage eliminated financial stress at a time when we were overwhelmed and sleep-deprived due to having so many young children to care for at once. And so to this day, I’m really grateful we made that decision well before kids came into the mix.

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Unfortunately, the gender pay gap is still alive and well. 

There’s a reason so many women struggle to build cash savings and shore up their finances. For years on end, female workers have fallen victim to the gender pay gap — a disparity in wages between women and men.

In a late 2022 study by the U.S. Government Accountability Office, women made up a good 44% of the workforce in 2021. And that year, women earned an average of $0.82 for every dollar brought home by their male counterparts.

The gender pay gap is even worse for women with management roles. Female managers only earned an average of $0.77 for every dollar earned by male managers in 2021.

Self-employed women are struggling, too. Among workers who were self-employed in their own incorporated business in 2021, women earned just $0.69 for every dollar earned by men.

The only sector where the gender pay gap wasn’t as extreme in 2021 was government agencies and non-profit organizations. Women working in that sector earned an average $0.85 per dollar earned by men. But that still represents a pretty notable difference.

If you’re a female employee and are convinced that you’re underpaid, it’s imperative that you not remain silent on that issue. The sooner you advocate for fair wages, the sooner your personal financial picture might improve.

Stand up for fair pay

Because the gender pay gap has existed for a long time, you may be somewhat resigned to bringing home a smaller paycheck than your similarly qualified colleagues who happen to be male. But that’s not a fate you should accept.

If you feel you’re underpaid and that your gender is to blame, raise the issue. Research salary data within your company and within your field and put it in front of your employer. It may be difficult to prove that you’re being paid less specifically because of your gender. But if the average person holding down your role within your industry or company makes $62,000 a year, and your salary is only $51,000, then you have a clear argument to present.

To be clear, you don’t necessarily want to come out and accuse your employer of gender pay bias (at least not without consulting an attorney first). But you absolutely can point to the fact that you’re statistically underpaid as a reason to warrant a pay boost.

Fight for the wages you deserve

A higher paycheck could do a lot of great things for your finances. It could help you pay off lingering credit card debt, build a retirement nest egg, and work toward near-term goals you might have, like paying for your kids’ college education or making a down payment on a home.

If you feel that you’re underpaid based on your job responsibilities and skills, then don’t hesitate to fight for a more equitable wage. You may not be able to cite gender bias outright, but you can certainly call out the fact that your wages just plain aren’t reflective of what you’re worth.

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Check out Dave Ramsey’s guide to filing taxes jointly or separately. 

Have you ever wondered if it’s worth filing taxes jointly or separately? You may have heard that couples filing jointly can benefit from certain deductions and credits, but is it always the right decision? Dave Ramsey, a personal finance expert and bestselling author, has some advice on when to file jointly or separately. Here is what he says.

What does “married filing jointly” mean?

First things first: Let’s define “married filing jointly.” This term refers to a tax status where a married couple files their taxes as one entity instead of two individuals. In other words, they both report their incomes and deductions on one tax return instead of filing separate returns for each spouse.

This filing status typically provides more tax benefits than filing separately and is available to couples who are legally married at the end of the tax year. However, couples who live together but are not legally married cannot file jointly because they don’t meet the IRS definition of “married” for tax purposes.

Advantages of filing jointly

The main advantage of filing jointly over separately is that it typically results in lower taxes overall compared to each spouse filing individually. But sometimes couples can save more money by filing separately, depending on their individual situations and incomes. According to Ramsey, there are four benefits to filing jointly:

Higher standard deduction: Filing jointly doubles the standard deduction from $12,000 to $24,000.More tax credits: Certain credits and deductions are only available if you file a joint return rather than separate returns for each spouse.Save time: You only have to file one return instead of two.Less complicated: Filing separately means there are more rules to follow.

Advantages of filing separately

Ramsey states that you should file separate returns if it saves you more money. You should choose whichever filing status gives you back more money in taxes. If you do your taxes yourself and use a software program, you can put in your information both ways to see which one is best for you and then choose that filing method. Ramsey says there are three reasons it may be better to file separately.

Your spouse isn’t paying taxes: Ramsey doesn’t recommend this but if your spouse is behind in their tax returns, you should still file yours.Your spouse isn’t being honest in their reporting: Both of you are responsible for your taxes, so if one of you is hiding income or falsely reporting deductions, it is best for you to file your own return.You have medical debt to claim: How much you can claim as a deduction is based on your earnings. So it may make sense to file individually to maximize the deduction.

In short, Ramsey states that more often than not, you are better off filing jointly. However, there are certain reasons you should consider filing separately, especially if you will get more money back from the government. To figure out which option will save you the most money based on your specific circumstances, use tax software to estimate or consult with a tax professional.

Ultimately, whether you should file your taxes jointly depends on your individual financial situation and goals. Do some research and you may want to speak with a professional before making a final decision so you can find out which option works best for you.

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Hint: It’s not a small amount. 

It’s not uncommon to owe money on a credit card or two. Maybe you ran into a string of costly home repairs you needed to charge and pay off over time. Or maybe your health took a turn for the worse and you had to charge a bunch of medical bills on your credit cards in the absence of having the cash.

The average credit card balance among all U.S. consumers is $6,320.98, according to New York Life’s latest Wealth Watch survey. And consumers are paying an average of $430 a month toward that debt.

But at a time when inflation is surging, that $430 might be a huge burden. So if you’re looking at monthly credit card payments you can’t afford, it pays to explore your options for lowering them.

A balance transfer could make your debt more manageable

A big reason why monthly credit card payments can be costly is that you’re constantly accruing interest on your balances, thereby adding to your totals. That’s why a balance transfer could make a lot of sense.

But you don’t want to do just any old balance transfer. Rather, you should aim to move your existing credit card balances over to a new card with a 0% introductory APR.

Many of these cards will give you a break on racking up interest for 12 months or more. And that could make it possible for you to shrink your monthly payments on your credit card debt in the near term without digging yourself deeper into a hole.

Of course, if you really want to make progress on paying off your credit card debt, then lowering your monthly payments isn’t your best bet. But you may need a few months to come up with a game plan for knocking that debt out. And you may need a little time to do something like line up a side hustle that will allow you to make decent progress. So if you do a balance transfer at a 0% introductory rate, you might end up with a lower monthly payment, which you can then pay more on as your finances allow for it.

Consider a personal loan, too

Personal loans make it possible to borrow money for any purpose. There’s really no such thing as an interest-free personal loan, even for a period of time. But personal loans tend to come with much lower interest rates than credit cards do. So by lowering the interest rate on your loan, you can, in turn, make it so you don’t have to spend quite as much money on a monthly basis.

To be clear, it’s always a good idea to pump as much cash as you can into paying off your credit card debt. That way, you’re likely to get rid of it sooner. But if you’re paying somewhere in the ballpark of $430 a month and that sum just isn’t affordable based on what living costs look like today, then it makes sense to explore different options that could leave you with lower monthly payments — at least for the time being.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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