Climbing the Steps to Financial Success

Credit
Section I / Section II / Section III / Section IV

Credit is a way of financial freedom... or slavery if overused. Credit is a two-edged sword in the financial arena. It is a tool to expand opportunities and protect in emergencies... yet overused, credit can commit you to years of struggles to climb out of debt. Information from your credit report can affect everything from insurance rates, employment and promotion opportunities, renting an apartment, and qualifying for a car or mortgage loans.

Myth #1: Credit is a way of handling money.

Reality: Utilized credit is debt, not a resource, unless paid in full each month.

Use of credit cards is one of the biggest problems that college students have. More students drop out of school because of credit and debt problems than poor grades. Suicides over credit and financial problems of students have been reported.

Reality: Commercialism makes consumers feel dissatisfied with what they have. It is not a level playing field since the consumer is competing with specialists in advertising and marketing. Self-control in light of society's commercialism is an ongoing challenge.

Reality: After some psychological financial freedom, it causes more stress and costs more in the long run. Loan consolidation is a short-term fix. If the user continues to add credit to existing debt with now increased fixed payments, it becomes the road to disaster.

Credit implies that goods, services, or money are received in exchange for a promise to pay a sum of money at a later time. When all credit is used to its limit and a bigger crisis or greater opportunity occurs, the curse is that there is no credit available anymore.

Credit is a way of spending future resources versus making choices about priorities-what is adequate versus ideal, now versus later, convenience versus saving money. It has been said, "It is better to prepare and prevent, than to repair and repent." Prepare to use credit wisely.

Students get into trouble because they do not understand the process and types of credit (including calling cards) and because they do not practice control. To control, understand the types of credit. Revolving credit (credit cards, lines of credit) requires a minimum amount to be repaid each month, but there is no fixed time to repay. Installment loans require a fixed amount (including interest) to be repaid monthly over a pre-set period of time.

Credit, if used irresponsibly, is dangerous and can be disastrous to student and family. Future employers may perceive credit problems as an indication of recklessness. They can't trust you with company resources if you cannot manage your own. Establishing and maintaining a good credit history is important because information stays on your record for seven years.

Capital - Credit expands opportunities. The ability to get credit for developing human and financial or business capital is a personal asset. Borrowing can lead to a higher level of living than otherwise possible. Credit can be a hedge against inflation (i.e. payments are made with cheaper dollars). Payments are fixed although prices for goods keep increasing.

Convenience - In today's world, credit is usually necessary for travel expenses such as hotel reservations, car rentals, and meeting emergencies. It can be a way of keeping track of expenses. It can be a method for parents to transfer necessary funds to you. Your being an authorized user on your parent's credit card is convenient in emergencies or when purchasing necessary services. Credit remains a convenience only if the monthly payments can be made on time and in full. Debit cards, which withdraw funds from your bank account directly, are a good alternative to credit cards.

Creeping Indebtedness - Paying less and less on a high balance, with increasing interest leads to creeping indebtedness. Balances keep rising as increased expectations lead to spending more than is earned. It becomes hard to understand why one is not "getting ahead." In addition, with late fees and missed payments, it is possible to actually owe more after several years of minimum payments. One cause of creeping indebtedness is depending on overdraft-protection. When checking account funds are insufficient for a check, the deficit is taken from the bank credit account automatically, but in increments of $100 regardless of the need. Examine patterns and habitual behaviors that are not in line with your other goals. You may not be aware of changing patterns. "If the water is turned up slowly enough, a frog will be boiled before it jumps."

Commercialism - Commercialism and advertisements make consumers feel dissatisfied with what they have or what they do. Credit's answer is to spend money whenever you need to resolve a problem or meet a need. In this world of immediate gratification, the "have it now, pay later" lifestyle is prevalent. Careful self-evaluation can help guard against the messages of the media. We can defer gratification by defining ourselves by our true dreams and goals and meeting them sequentially.

Crime - Use of another's credit card or Social Security number, co-signing for a loan, identity theft and fraudulent use of another person's Social Security number and credit information are serious and rising problems. Be very cautious about giving out personal identity information (i.e., credit card number, PIN, bank account number, S.S. number) or allowing others to use your credit card. The extension of credit to those who are unable to pay, who are not knowledgeable of the credit process, are addicted to gambling or other substances, or desperate can be seen as criminal. Using credit cards to buy lottery tickets or older persons making unnecessary house repairs with credit can also be seen as criminal.

Curse - A curse falls upon the consumer when all credit is used and a real emergency occurs. A curse occurs when you no longer think about purchases. Bankruptcy and loan consolidation often bring more stress and increased costs later. Credit provided to those who have a gambling problem or other addictions can lead them further into the pits of financial despair. One of the curses of credit is that you no longer need to think, plan, and set priorities; instead, one passively accepts all that credit can buy. Signing for a credit card to get a free candy bar or tee-shirt (or whatever) is not the right reason - it could be the most expensive candy bar or tee shirt you ever got!

Cure - The cure is to understand the credit process. For example, know whether your student loan is deferred for beginning payments, when the interest charges begin, or if the interest is also deferred. The method for calculating interest in student loans as well as other types of debt determines whether deferment or the sooner paid the better is wise and less expensive.

Calculate the cost of credit, using real interest rates and totals. Comparison shop, and change your credit use to reflect careful, thought-out decisions. Control your buying by combating commercialism and reconciling expenses with income. Only charge as much as you can afford to pay off in full when the bill comes due. In short, use credit wisely. Become financially literate and an assertive consumer. Get information and order free publications on many subjects from the Federal trade Commission.

Compare offers and interest rates. Understand your own needs. If you carry a balance, look for the lowest annual percentage rate (APR). If you never carry a balance, look for a card with no annual fee. If you are a high user, look for suitable perks (e.g. rebates, airline miles). Be cautious of short-term introductory-or "teaser" rates. Negotiate interest rates by calling to ask for a lower rate.