Once you graduate from college and have some financial independence, it is important to learn the keys to managing your credit.
Smart and dumb debt: know the differenceIt can be very tempting to try to compete with your peers, but this can mean living beyond your means. You might assume that someone is rich because he has a big house, designer clothes and a luxury car. There is a chance that they are making a generous salary, but they also might be living an illusion. It’s possible that they have a tremendous amount of debt and can barely make ends meet. This is dumb debt and you should beware! Carefully consider your income and spending habits and be sure that you aren’t making impulse buys that you don’t need and can’t afford. This is a key step in managing your credit well.
Smart debt, on the other hand, is the kind of debt that can help you build equity and reach your financial goals. Smart debt can include a mortgage or a graduate degree. As long as you make your payments on time and pay the full amount expected, this debt can improve your living situation and even make you more employable.
Pay down your existing debtIf you racked up debt in college, you will need to plan a good strategy for paying it off. One of the best things you can do is accelerate your payments, especially for the accounts that have high interest rates. This is a very important step in managing your credit, and will take some serious budgeting on your part. It’s worth it, though, because it can end up saving you money in the long run. When working out a plan to accelerate your payments, remember to leave yourself enough money for your rent or mortgage payments, as well as for utilities and food.
If you carry high balances on a number of accounts, you might want to consider debt consolidation, otherwise known as consolidation loans. Debt consolidation pays off your outstanding balances with one lower-interest loan. You then pay off that loan instead of juggling payments of all of your outstanding debts. This can be a good option if you have a number of debts to pay off, but it is very important that you don’t start charging up your credit cards once they are cleared by your consolidation loan. Otherwise you will find yourself in a worse predicament than before.
You might also want to look into different repayment options for your student loans. If you took out federal Stafford loans, you can choose a plan that fits your financial situation. The options are generally standard, graduated or income-sensitive repayment plans.
Pay on time, every time.One of the simplest methods of managing your credit is to pay on time, every month. You should also make at least the minimum payment on your loans and credit cards every single month. If you pay late and don’t make the minimum payment, your credit score will be lowered and that can make it difficult to get other lines of credit or loans. It also winds up costing you money because you get higher interest rates than people with high credit scores. Setting up a payment schedule and having your bills electronically debited from your account can help you stay on top of your credit.
As a young, single person you’re likely to just be starting your independent life. Now is the time to start managing your credit wisely so that you are well-prepared for the future.