If you’re struggling with your finances, you may be focused on how to pay your bills and give little thought to the future impact of a bad credit score. While most of us are aware that bad credit could stop you from getting approved for financial products, you may not appreciate how bad credit can affect your mental health.
Why Your Finance Has an Impact on Your Mental Health:
Many mental health experts have acknowledged the link between mental health and debt. Research has shown that 46 percent of people with debt problems also experience mental health problems.
Poor financial habits can also exacerbate existing stress. For example, if you spend money as a coping mechanism to deal with stress and anxiety, this can be both financially and mentally problematic. If you believe that buying a particular item will make you feel better, you are likely to prioritize that purchase even if you incur debt as a result.
The link between finances and mental health became more obvious during the 2020 Covid pandemic. During the pandemic 4 in 10 adults in the U.S experienced depression. This is a massive increase on the 1 in 10 who reported depression or anxiety in 2019.
While part of this increase could be attributed to fear of the virus and the potential implications of getting sick, job losses and the financial fall out from isolating and being out of work also affected mental health.
Money is also often cited as a source of domestic arguments, which can further exacerbate stress and contribute to psychological aggression in the home.
Tips to Reduce the Impact on Your Mental Health:
Fortunately, there are ways to lessen the impact of bad credit or poor finances on your mental health.
Have an Honest Evaluation:
Subconsciously, you’re likely to be aware that your finances are having a negative impact on your credit. However, by not acknowledging the true picture of your finances, your stress and anxiety are likely to be even higher. Having an honest evaluation of your finances may actually set your mind at rest, as things may not be as bad as you thought.
Set a Budget:
Financial stress is often due to a disconnect between your income and what you’re spending. However, you can alleviate this by creating a budget and tracking your spending. It is important to be realistic and think about what you actually need to spend, as you could feel even more stress if you cannot stick to your budget. Following a budget can help you to feel more in control of your finances, which can help you to feel more positive about working towards your goals.
Create a Financial Buffer:
If you’re constantly worrying that an unexpected bill could derail your finances, you need to consider creating a financial buffer.
Having an emergency fund can provide peace of mind, so aim to make small contributions each week or month into a separate savings account. These days when interest rates go up, you can find attractive online savings accounts offering more than 2.5% APY which can grow your emergency savings account quickly.
Talk to Someone:
If you can’t confide in family members, you need to try to speak to someone about your financial concerns. Speaking to a financial counselor or expert can not only help to become more informed about how to improve your credit, but also provide a feeling of reassurance.
How to Improve Bad Credit:
Now, you’re aware of the impact bad credit can have on your mental health, you may want to consider how to improve your bad credit. There are a number of measures you can take that can help to increase your score.
Establish a Debt Repayment Plan:
Once you’ve completed the above steps, you need to establish a debt repayment plan. This will help you towards making progress in paying down your existing debt. There are a number of different debt repayment plan strategies, but all rely on setting a budget of how much you can repay each month and ensuring this amount goes towards your outstanding debt.
As you pay down your debt, it will decrease your credit utilization ratio, which will help to boost your score.
Get to Grips With Your Bill Payments:
Your payment history makes up approximately 35% of the calculations to determine your credit score. So, it is crucial that you ensure that you make your payments on time every month. This will also help you to avoid those costly late payment fees.
You can get to grips with your bill payments by creating a filing system to track your monthly bills, set alerts for when the due dates of bills are approaching and set up auto pay from your bank account.
Set Up An Automatic Savings Plan:
While you’re getting your finances under control, it is a good idea to set up automatic contributions to your savings account or investment fund.
If the funds come out of your account on payday, you’ll be less likely to spend the money on non essentials. This will help you to build a more stable financial future.
Consider Additional Source of Income:
Adding an additional source of income can help to improve your finances and ease some of your financial stress. If you take on a side hustle, it could be a short term option or a permanent income upgrade.
This will not only help you towards reaching your financial goals, but your income to debt ratio will look more impressive to the credit bureaus.
Aim to Reduce Your Credit Utilization Ratio:
We’ve already discussed paying down your debt to reduce your credit utilization ratio, but you can also do this by asking for a credit limit increase from your existing lenders. Providing you can be disciplined about not increasing your balance, a higher limit on your credit cards will immediately reduce your ratio.
Bad credit can have a massive impact on your financial future, but it can also be detrimental to your mental health. While it may be daunting, if you start to tackle the underlying financial issues, you can start to feel more positive and give your mental health a boost.