by Adhvith Dhuddu, Collegiate Times Regular Columnist
Tuesday, September 4th, 2007.
America is a credit economy. We have mastered the art of borrowing money and then spending more than we borrowed.This is true with the government (we're running record trade and fiscal deficits right now) and also tends to be true with people who don't manage their money well.
Our weapons of mass destruction are called credit cards.Credit cards entice us into spending beyond our means. Having no credit card is a bad solution because this will stifle us from building a good credit history. Everyone knows that a good credit history is vital; it establishes the interest rate we pay on our loan when we buy that first car or home.Also, owning a credit card seems inevitable in this increasingly cashless economy.
Before divulging on good and bad uses of credit cards and the details of credit scores and credit history, understanding the concept of debt is important.When you borrow money, you are the borrower, and your credit card company is the lender. You pay back the money you borrowed with an interest, the fee you are obligated to pay for the money you borrowed, which you otherwise wouldn't have.Clearly, when you use a credit card you take on debt. In a broad sense there are primarily two forms of debt: good debt and bad debt.
In both cases you borrow money, but in the first case it's used to add value to you (debt to buy a home, to invest or to attend college) and in the second case (debt used to make frivolous purchases that lose value over time), it has detrimental effects.We as college students need to worry more about the second form of debt. We frequently use credit cards to make everyday purchases and don't really worry about buying a new home or car. Let's see how this problem can be tackled.The solution is pretty simple and straightforward.
You can apply for and own just one credit card with the minimum credit limit (your credit limit or line of credit is the maximum you can borrow/spend when you use your credit card). This way, you have the luxury of using it when you need to and you also build your credit history.
You don't need a credit card with a $5,000 line of credit and $150 minimum payments every month to build a good credit history. All you need is one credit card with a $500 line of credit and about $30 to $40 minimum payments. This option is easier; it builds your credit history and simultaneously prevents you from overspending.
When you pay your monthly bills, it is best to pay the full amount due and not rack up any debt. By paying your full dues you are virtually gaining access to free money, but if you extend paying the full amount and only pay the minimum amount required, you will be charged interest on the amount you owe.Credit card companies also charge interest on interest (compound interest), which is again dangerous if you don't pay your full amount every month.
Building your credit history as mentioned above is essential. Your credit score is derived from your credit history, in simple terms, your credit score is a report card of how you have handled debt historically.What are the main components of your credit score? Maximum weightage is given to the promptness of your payments, so making timely payments is essential.
The second most important aspect is something called the "current debt to limit ratio."Say your credit limit is $500 and your balance (the money you've borrowed) is $350, your ratio is 70 percent. It's ideal to keep this ratio at or below 50 percent. These two yardsticks (timely payments and debt-to-limit ratio) influence your credit score almost 65 percent.
It's a bad idea to apply for a new credit card if you don't need one. Doing this will reduce the average age of your account and will have harmful effects on your credit score.Also, one of the worst habits is to apply for those Gap, Circuit City or American Eagle in-store cards.
You may think you're being smart by getting a 10 percent discount, but owning these cards have damaging effects on your credit score.By doing this you are technically increasing the amount of credit you can get (more cards, so more debt) resulting in a lower credit score. The other factors just discussed contribute to the remaining 35 percent of your credit score.
There is no ideal credit card that one can own, but there are always good deals up for grabs. Two great places to explore this are www.cardweb.com and www.creditcardsearchengine.com. The second website also has a dedicated section for student credit cards.
Next week, I'll discuss things you should watch out for when you open a bank account, and how you can smartly invest unused money lying in the bank to earn a tidy and risk-free income.
Online link to this article:
http://www.collegiatetimes
Tuesday, September 4th, 2007.
America is a credit economy. We have mastered the art of borrowing money and then spending more than we borrowed.This is true with the government (we're running record trade and fiscal deficits right now) and also tends to be true with people who don't manage their money well.
Our weapons of mass destruction are called credit cards.Credit cards entice us into spending beyond our means. Having no credit card is a bad solution because this will stifle us from building a good credit history. Everyone knows that a good credit history is vital; it establishes the interest rate we pay on our loan when we buy that first car or home.Also, owning a credit card seems inevitable in this increasingly cashless economy.
Before divulging on good and bad uses of credit cards and the details of credit scores and credit history, understanding the concept of debt is important.When you borrow money, you are the borrower, and your credit card company is the lender. You pay back the money you borrowed with an interest, the fee you are obligated to pay for the money you borrowed, which you otherwise wouldn't have.Clearly, when you use a credit card you take on debt. In a broad sense there are primarily two forms of debt: good debt and bad debt.
In both cases you borrow money, but in the first case it's used to add value to you (debt to buy a home, to invest or to attend college) and in the second case (debt used to make frivolous purchases that lose value over time), it has detrimental effects.We as college students need to worry more about the second form of debt. We frequently use credit cards to make everyday purchases and don't really worry about buying a new home or car. Let's see how this problem can be tackled.The solution is pretty simple and straightforward.
You can apply for and own just one credit card with the minimum credit limit (your credit limit or line of credit is the maximum you can borrow/spend when you use your credit card). This way, you have the luxury of using it when you need to and you also build your credit history.
You don't need a credit card with a $5,000 line of credit and $150 minimum payments every month to build a good credit history. All you need is one credit card with a $500 line of credit and about $30 to $40 minimum payments. This option is easier; it builds your credit history and simultaneously prevents you from overspending.
When you pay your monthly bills, it is best to pay the full amount due and not rack up any debt. By paying your full dues you are virtually gaining access to free money, but if you extend paying the full amount and only pay the minimum amount required, you will be charged interest on the amount you owe.Credit card companies also charge interest on interest (compound interest), which is again dangerous if you don't pay your full amount every month.
Building your credit history as mentioned above is essential. Your credit score is derived from your credit history, in simple terms, your credit score is a report card of how you have handled debt historically.What are the main components of your credit score? Maximum weightage is given to the promptness of your payments, so making timely payments is essential.
The second most important aspect is something called the "current debt to limit ratio."Say your credit limit is $500 and your balance (the money you've borrowed) is $350, your ratio is 70 percent. It's ideal to keep this ratio at or below 50 percent. These two yardsticks (timely payments and debt-to-limit ratio) influence your credit score almost 65 percent.
It's a bad idea to apply for a new credit card if you don't need one. Doing this will reduce the average age of your account and will have harmful effects on your credit score.Also, one of the worst habits is to apply for those Gap, Circuit City or American Eagle in-store cards.
You may think you're being smart by getting a 10 percent discount, but owning these cards have damaging effects on your credit score.By doing this you are technically increasing the amount of credit you can get (more cards, so more debt) resulting in a lower credit score. The other factors just discussed contribute to the remaining 35 percent of your credit score.
There is no ideal credit card that one can own, but there are always good deals up for grabs. Two great places to explore this are www.cardweb.com and www.creditcardsearchengine.com. The second website also has a dedicated section for student credit cards.
Next week, I'll discuss things you should watch out for when you open a bank account, and how you can smartly invest unused money lying in the bank to earn a tidy and risk-free income.
Online link to this article:
http://www.collegiatetimes
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