Disclaimer: Nothing in this site should be considered authoritative financial advice. Your circumstances are unique and you may want to consult a financial advisor.
IV. Managing Credit, Loans, and Debt
Thinking of buying a car? Paying for college or buying a new home?
Few individuals can purchase these outright, and instead, may have to borrow the money. You may need to consider borrowing a loan or using credit. However, not all debt is "good" debt. Check out this article for an idea of the type of credit you are getting into ahead of time.A. Credit Cards
Credit cards are often more convenient to use than paying cash, but use of credit cards may get out of control. Credit is a loan, a debt that must be repaid. So why use a credit card? They are great for emergencies and can help you establish a good credit history. Your credit card statement can help you keep track of your expenses and might even categorize the type of expense.
Should you have a credit card? Probably. Should you have multiple credit cards? Probably, but not too many. Every credit card application is recorded on your credit report whether or not you actually use the card.
When shopping for a credit card, and yes, you should shop around, consider the following:
- What is the annual percentage rate (APR)? hint -lower is better
- Is the APR fixed or variable?
- What are the fees?
- Is it a "secured" or "unsecured" card? Secured cards are useful when you are trying to establish a credit history, but they require a deposit. Unsecured cards are usually obtained when you already have a good credit history.
- Read the fine print! Every credit card comes with a disclosure summary that will discuss the grace period for repayments, annual fees, transaction fees, and other very important details.
College Students & Credit - the CARD Act became law in February 2010. Find out how this law affects you.
Paying off your credit card?
Just as compound interest increases your savings accounts, interest rates on your credit card also mount up. Suppose you purchased a new laptop for $1000 on your credit card which charges 18% interest each month. If you choose to pay only the minimum each month it would take over 12 years to pay it off.
Like credit, a loan is a debt that has to be repaid over a period of time. There are usually fees attached to the loan and the lender charges an interest rate. As an educated consumer, you would shop around for a loan.
There are many types of loans, for instance, there are loans:
- to be used for a specific purpose, e.g. educational loans
- with fixed rates, variable rates and adjusted rates
- with different loan periods
- with different attached fees
- installment versus line of credit
So why bother getting a loan? Because you don't have the finances currently available for some purchase. Your choice is to get a loan (or use credit card) or wait until you have saved enough. Not many individuals have ready cash to pay for their college tuition.
Thinking of buying a car? My bank has new and used auto loans for as low as 4.99% APR *. If you read the fine print it probably includes "your actual rate may vary." Often, the actual rate you are offered is influenced by the lenders estimation of your ability to repay the loan. The lender usually consults a credit reporting agency to get your credit score.
C. Accessing and Understanding Your Credit Report
Financial transactions such as credit card applications and payments, installment loans, mortgage payments, and bankruptcies are reported to credit reporting agencies. The Federal Trade Commission oversees the nation's credit reporting agencies: Equifax and TransUnion. Lenders consult these agencies when you buy a car, or apply for a mortgage loan. Your credit report may affect whether you get that loan and what interest rate you will be charged.
Get a copy of your credit report. The Fair Credit Reporting Act (FCRA) requires each of the nationwide consumer reporting companies - Equifax, Experian, and TransUnion - to provide you with a free copy of your credit report, at your request, once every 12 months.
You can even stagger your requests, for instance, in January request a copy from Equifax, in May request a copy from Experian, in September request a copy form TransUnion, and then the following January request a copy from Equifax, etc. These reports are available free by going to www.AnnualCreditReport.com.
Review your credit report.
- Is it accurate?
- Does it list credit cards not in your possession?
- Are your balances accurate?
- Have there been inquiries into your account that you don't recognize?
Discrepancies should be reported back to the credit agency.
In addition to requesting your credit report from each of the three agencies, you may elect to "freeze" the report. This security freeze prevents other people and companies from accessing your file unless they have a prior relationship with you. This service is free to Maryland residents who are victims of identity theft, otherwise there is a $5 fee for each agency. Click here for more information and how it pertains to residents of different states.
D. What is Your Credit Score?
Creditors use credit scoring systems to determine if you'd be a good risk for credit cards, auto loans, mortgages and insurance. A higher credit score means you are likely to be a good risk, which, in turn, means you will be more likely to get credit or insurance-or pay less for it.
Credit scoring is a system creditors use to help determine whether to give you credit. It also may be used to help decide the terms you are offered or the rate you will pay for the loan. Information about you and your credit experiences, like your bill-paying history, the number and type of accounts you have, whether you pay your bills by the date they're due, collection actions, outstanding debt and the age of your accounts, is collected from your credit report. Using a statistical program, creditors compare this information to the loan repayment history of consumers with similar profiles.
Your free credit report does not usually include your credit score. A fee is usually charged to obtain your credit score. Each credit reporting agency has their own formula for calculating your credit score. Your score may determine whether you get a loan, what interest rate you will pay. A low score may result in a higher interest rate, costing you thousands of dollars in interest.
E.Managing Your Debt
Credit cards can be a convenient way of managing your money when handled properly. However, if not managed carefully, your spending habits can actually cause big problems.
Once you realize that your credit card debt may be out of control, don't panic! The most important thing is to do something about it. There are several steps you can take to gain control of your financial future again. However, you will more than likely have to alter your spending habits. Here are a few tips you can do to regain control of your debt:
- Set a Budget and stick to the plan. Revise your spending and look for ways to reduce your expenses (see budgeting section for more tips).
- Call your credit card company and see if they can work with you on an acceptable payment plan that fits into your budget.
- Use your savings and other assets to pay down your debt.
- Look to the government for additional resources for which you may be eligible.
- Talk to a credit counselor
If you are experiencing financial difficulties, don't lose hope. There are options out there if you are willing to act. Click here for more ideas on how to manage your debt.
F. Student Loan Debt Consolidation
Once you stop borrowing, you will have a certain amount of time to pay back loans. Sometimes, students will borrow from multiple agencies and for multiple years, federal or private. Here are some helpful links for consolidating student loan debt: