How to Recover From Common Financial Mistakes

1. Letting Your Credit Score Go Down

Your credit score can be a key factor in qualifying for loans and credit cards, renting an apartment and even getting certain jobs. Those with good credit scores are more likely to get better interest rates and terms on loans, and pay lower deposits on housing and utilities. In other words, maintaining a good credit score could save you a lot of money when it's time to borrow.

If your credit score dropped due to late or missed payments, high credit card balances or other factors, here are some ways to improve it:

• Pay your bills on time. Your debt payment history makes up 35% of your FICO^® Score^☉ , the credit score used by 90% of top lenders—and a single late payment can stay on your credit report for up to seven years. Paying every bill on time going forward can help lift your score by demonstrating that you can manage your credit responsibly. Consider setting up autopay so you never forget a payment.
• Use less available credit. The amounts you owe on your accounts makes up almost one-third of your FICO^® Score. Organize all your open balances and make a debt-payoff plan. In particular, aim to pay down revolving credit accounts (such as credit cards) to get your credit utilization as low as possible.
• Don't close old credit card accounts. The length of your credit history accounts for 15% of your FICO^® Score. The age of your oldest and newest accounts, as well as the average age of all your accounts, determines the length of your credit history. This is why it's a good idea to keep old credit card accounts open, even if you only use them occasionally.

2. Depleting Your Cash Savings

A healthy emergency fund is an essential part of financial wellness. While experts generally recommend saving three to six months' worth of expenses, hitting that target isn't always easy. You may have depleted your emergency savings for any number of reasons—from navigating job loss to being hit with a surprise expense. Consider these steps for rebuilding:

• Set a new savings target. Start small and determine a monthly savings target that feels reasonable for your budget. Every little bit adds up, even if it's only $50 per paycheck. Set up monthly transfers to your savings account to make it automatic.
• Put cash windfalls in your savings account. Cash windfalls can give your savings account a nice boost without impacting your day-to-day spending. If you're expecting a tax refund, work bonus, raise or inheritance, earmark this money for your emergency fund.
• Increase your income. Whether it's picking up a side gig or selling things online, there are plenty of ways to generate extra money. Funnel your extra earnings right into your emergency fund. Just be sure to understand your tax liability.

3. Accumulating More Debt Than You Can Afford

The total average debt balance in 2020 was nearly $93,000, according to Experian data. That includes credit cards, student loans, car loans, mortgages and more. How much debt is too much? The answer depends on your lifestyle and income. If debt payments are costing you so much that you're struggling to make ends meet or accomplish your financial goals, that's a red flag that something needs to change. The following action items can help you get a handle on your debt:

• Consolidate your debt. Those who have high-interest revolving debt such as credit cards might benefit from a consolidation loan. This involves taking out a new loan with a lower interest rate, then using it to pay off your high-rate balances. You'll then have one monthly payment that may be less than what you were paying before. You can also consider refinancing term loans like student loans, mortgages and auto loans.
• Make a plan for reducing your debt. List out your debts and look at your minimum payments, interest rates and total balances. From there you can settle on a debt repayment strategy that works for your budget. Often, it's best to start with high-interest debts such as credit cards. The snowball method has you pay more toward the smallest card balance while continuing to make the minimum payments on all your other debts. Once that's paid off, you move on to the next smallest. Alternatively, you may choose to prioritize the balances with the highest interest rates first.
• Consider credit counseling. If you're feeling overwhelmed by debt, working with a credit counseling agency can help you manage your money and strategize a way out. Most provide financial education and debt payoff assistance, which might include creating a debt management plan. When looking for a credit counselor, focus on reputable, accredited organizations. The National Foundation for Credit Counseling or the Financial Counseling Association of America are good starting points.

4. Falling Behind on Retirement Savings

Experts typically recommend saving at least 15% of your gross income for retirement. If you're behind on these targets, don't stress. The best time to start saving is now.

• Take advantage of employer plans. Opt into any employer-sponsored retirement plans that may be available to you. Tax-advantaged accounts like a 401(k) allow you to build your nest egg while reducing your taxable income today—even better if your employer matches a portion of your contributions.
• Open an individual retirement account (IRA). If you don't have access to a 401(k) plan, consider opening a traditional or Roth IRA. Each offers its own tax advantages and provides a wide range of investment choices.
• Gradually increase your contributions. If saving 15% of your income isn't feasible right now, settle on a number that does work for your budget—then make it a point to increase your contributions by a percentage or two every year.

5. Living Beyond Your Means

If you find yourself counting down to payday every month, you're not alone. Breaking the cycle begins with financial awareness.

• Revisit your budget. Check in on your budget or create one with our step-by-step guide to see if you can free up extra money. This might require reducing monthly bills and dialing back on nonessential spending. Tracking your expenses is a simple way to identify overspending patterns and rein in impulse shopping. Also look at essential spending. For example, experts recommend keeping your housing payment below 28% of your gross monthly income. If it exceeds that, you may need to rethink your living arrangement.
• Increase your income. Freelancing or starting a side business can be an effective way to supplement your income. You could also consider negotiating a pay raise with your current employer or interviewing for a new position altogether. When job hunting, tap your network and polish your LinkedIn profile and resume. Filling a temporary position might also lead to a better-paying permanent placement.

The Bottom Line

Financial resilience is real and attainable—and past mistakes don't have to stick with you forever. Resources like free credit monitoring from Experian can help make it a little easier to rehab your finances.