What your financial past can tell you about your future

Most of us can learn lessons from our past. Lenders look at your financial past (credit record) to make judgements about how they think you'll handle money in the future. Their decision about your credit-worthiness can affect how much you have to pay for credit, or whether you get any at all.

Economists often make predictions about the future shape of the economy. Of course, no one can predict the future - in fact, most economists didn't predict the 2008 financial crisis until it was upon us. However, they can look at trends and how markets behaved in the past to help them predict how the economy will look in the future.

What you could learn from your own financial past

The world of finance looks at the past to make all sorts of important decisions - and you could too. Think Money recommends you take a look at your finances today and compare them with your finances exactly one year ago. January's an obvious time to do that.

Your 'annual review' will give you a better understanding of whether your situation is improving, staying the same, or getting worse. Once you have that information, it'll help you plan what you will do about it in 2012.

Documents you will need for your annual review

Just find the documents that you do have: bank statements from now and then, receipts, budget plans, bills, any personal credit agreements, tax information, wage slips, details of any insurance policies, credit record (try Experian, Equifax or Callcredit) or any other documents to do with your financial affairs today and one year ago.

Things to look out for

Unsecured debts (i.e. excluding mortgages)

Credit cards, personal loans, overdrafts, payday loans, store cards, catalogue debts, car finance. Have you got more or less debt than this time last year? Can you pinpoint why?

Simply having more debt isn't necessarily a problem as long as you can still comfortably afford it. If you can't, speak to an expert about your debt management habits - a budget should reveal what you can or can't afford to pay.

If you are struggling with unsecured debt repayments, you could do something about it with the help of a debt expert, whereas the price of petrol (like so many other expenses) is something that you can't do anything about.

It's important to get professional debt advice sooner rather than later if you are concerned, so that you can find a debt management approach that suits your circumstances.

Cost of living

Travel costs, food, household expenses, utilities. Are you paying more or less than this time last year? Can you still afford these costs? If not, is it because of a drop in income, because of growing debt, or because of a change in your circumstances? What steps have you taken already to improve your finances, or what steps could you take in 2012?

Think Money has a number of guides to subjects like budgeting, with helpful suggestions for ways to save money, including switching your energy provider or setting up Direct Debits for regular payments - which can sometimes earn you a discount.

If things have improved

It could be that your financial situation has improved or remained the same since this time last year. If so, don't rest on your laurels! There is usually at least one thing that most people would like to change about their financial situation, even if they are fairly comfortable. Look back at how you did improve your finances over the last 12 months, or how you kept them on an even keel, and try to keep that momentum going into 2012.

Tags: review, financial review, past, credit record, future, credit rating, budget, save money, financial past