Go to navigation Go to content

Financial wellness: Debt and credit


Debt is money that you owe. The majority of debt comes from credit cards, loans, and mortgages. If you struggle with debt, you're not alone; many Americans struggle with it. It’s estimated that the average American is in over $225,000 of debt, when taking into account credit cards, loans, and mortgages.

Unfortunately, it's now being discovered that debt has a profound impact on health. Researchers have found that individuals with a higher debt-to-asset-ratio have worse self-reported health, higher diastolic blood pressure, and higher perceived stress and depression. The first step in improving your financial wellness, and therefore your overall wellness, is assessing your debt.

  1.  Know the debt warning signs.  

It can be easy to fall into debt without realizing it. Here are 10 warning signs that you likely have too much debt:

  1. You are spending more than 20% of your paycheck on paying off debt.
  2. You are borrowing to pay off other debts.
  3. You are unaware of how much money you owe.
  4. You only make the minimum payments on each bill.
  5. You frequently miss payments or pay bills late.
  6. You receive calls from creditors.
  7. You have been refused extended or additional credit.
  8. You have been borrowing from your retirement account or using credit cards to pay other monthly bills.
  9. You write postdated checks.
  10. You have taken an extra job in order to help pay your bills.

If you have experienced some of these warning signs, we recommend taking steps to reduce your debt. Depending on the severity of your debt, you may want to contact a financial planner and have them help you create a plan to pay off your debt.

  2. Create a plan.  

Having debt can be overwhelming, but by creating and sticking to a plan, you can reduce your debt significantly. Develop a budget to get a strong understanding of your income, expenses, and debt. Create SMART (specific, measurable, achievable, relevant and timely) goals to pay debt off. Remember to allocate funds to pay off debt accordingly on your budget.

Debt Snowball method

The Debt Snowball method is a simple strategy for managing debt from multiple accounts. The snowball method will help you save money, but it also helps you easily see your progress.

  1. Sort all of your debts by the size of the balance, with the smallest balance at the top.
  2. Use your extra cash each month to pay off the debt account with the smallest balance.
    • Once that account is paid off, take the money you were putting towards paying that account, and roll it over into the debt account with the next lowest balance.
  3. Repeat the process until all of your debt is paid off.

Debt resources


Credit plays a crucial role in the finances of individuals and families, but it can be very challenging to understand. Being aware of your credit will help you develop smarter spending habits.

  1. Know the types of credit.  

To put it simply, credit is money you borrow to make purchases. Credit allows you to pay for major expenses without having the money immediately available. Receiving credit involves an exchange between two parties, the lender and the borrower. The person seeking the loan is considered the borrower, while lenders typically consist of banks, investment companies, credit unions, and the government. The most common forms of credit are credit cards and loans.

Understanding Credit Cards

Understanding credit cards can be overwhelming due to the endless variety of features and rewards, but all credit cards work in the same basic way.

  1. Apply for the card.
    • If approved, the card company will send you the credit card and information regarding the card’s interest rates, spending limits, and payment deadlines.
  2. Activate the card.
    • Once activated, you are able to use it for purchases at most stores. You will receive a statement each month which outlines your purchases, how much you owe, and the payment due date. As long as you pay the full amount each month, you will not incur any interest.

It’s important to understand basic credit card terminology before signing up for a credit card. Use the credit card glossary to get to know basic credit vocabulary, or see some of the more basic terms you are likely to encounter below:

  • Credit Limit: The amount of money that can be charged to a credit card account.
  • Principle: The amount you owe, excluding interest.
  • Interest Rate (APR): The percent of interest that the card issuer charges you is typically given as an annual rate, known as APR. To calculate the monthly rate you will receive, divide the APR by 12.  
  • Balance: The amount of money that you owe, including interest.
  • Grace Period: The time period in which you can pay the credit card bill without accruing interest.
  • Available Credit: The dollar amount that can still be purchased using the card. This sum is calculated by subtracting the balance from the credit limit.
Understanding Loans

There are a variety of reasons why someone might take out a loan, including buying a car or home, starting or expanding a business, or going to college. The cost of a loan depends on how much you borrow, the Annual Percentage Rate (APR), and how long it takes to pay it off. The more quickly you pay off a loan, the less total interest you will pay. Qualifying for a loan is dependent on your credit history, income, and the type of loan you are looking to take out. There are two basic categories of loans:

  1. Secured Loans: Loans protected by some sort of collateral, such as a home or car. Secured loans offer lower interest rates, higher borrowing limits, and longer timeframes to pay. However, you risk losing your collateral if you fail to make timely payments. Examples of secured loans include mortgages, home equity lines of credit, and auto loans.
  2. Unsecured Loans: Loans that do not have collateral. That means that the lender has a greater risk of not being paid back, and therefore the borrower is at greater risk of being turned down for an unsecured loan compared to secured one. With unsecured loans, the lender must believe the borrower has the financial resources to pay back a loan. Interest rates are typically considerably higher for unsecured loans. Examples of unsecured loans include credit cards, personal loans, personal lines of credit, and student loans.

  2. Learn about credit scores.  

Credit has many benefits, but it can also negatively affect your finances. If you use credit without considering what an affordable monthly payment means to you, it may be difficult to pay the money back on time. That can mean unaffordable interest, late-fees, and even a lower credit score, which can lead to higher prices on future purchases bought on credit.

Here's an example: you want to purchase a new car, so you ask the bank for a $15,000 car loan. If you have a good credit, you may get an interest rate of 4.5%. However, if you had a lower credit score, the bank considers your loan to be higher risk--which means you may be granted the loan, but with an interest rate of 15%. If both loans were 60 months long, you would end up paying almost $5,000 more at 15% interest compared to what you would pay with 4.5% interest.

FICO score

Your FICO score is the most commonly used measurement of credit. FICO scores range from 300-850. The higher the score, the better your credit. Calculating FICO scores is complex, but the five components that go into the score are simple to understand:

  1. Your credit payment history (35% of score)
  2. Your total amount of debt (30% of score)
  3. The Length of your credit history (15% of score)
  4. The different types of credit you use (10% of score)
  5. The new credit you hope to have given to you (10% of score)

Interested in learning your FICO score? Many financial institutions now provide them as a complimentary piece of their overall service. Check with your financial institution to see if they can provide you with information about your score.

  3. Avoid these credit habits.  

Credit cards can be a tool for building credit, but their convenience makes it easy to fall into debt if the borrower isn't careful. It is important to avoid developing harmful credit card habits. Here are some particular things to avoid:

  1. Carrying over a balance from one month to the next.
  2. Paying only the minimum balance.
  3. Using too many credit cards.
  4. Using credit cards for cash advances.
  5. Missing credit card payments.
  6. Exceeding the maximum amount of credit on the card.
  7. Not budgeting or tracking your credit card spending on a monthly basis.
Credit resources

Reviewed April 05, 2017.