Unless you have been living in a daze, you are quite aware that the economic situation of the U.S. and the World is bleak. While there are a number of theories and reasons for what has created state of the economy to be what it is, it is important to understand what you can do now to weather the storm and insure that once you are in the ‘real world’, you will have the basic tools to survive.
One of the most important things that you can do now or in the very near future is guard your credit.
I can speak from experience that credit can be a wonderful asset to your life or a nightmarish obstacle. When you turn eighteen you will begin to receive numerous credit card offers. The offers will say things like ‘low introductory rate’, ‘free gift’, or ‘you are pre-approved’, etc.
The credit card companies are masters of deception in the sense that they paint a pretty picture at the beginning and then the moment you make a mistake (miss a payment), the fine print in your contract will come back to bite you.
The good and the bad
It is important that you establish your credit because when you are ready to buy a car or home you will need to have credit established. What I am warning you is that when you do begin to get those offers, you make the right choice for you and your life. Here are my tips to do that.
First, you have to understand how the credit business works. When you get a credit card you are basically borrowing money any time you use it. Your interest rate (A.P.R. annual percentage rate) is the percentage of the amount you are borrowing that you will have to pay back in addition to the amount you borrow. Sound confusing? That is what they (credit card companies) want and that is how they get you.
Breaking it down to the basics
Let me try to make it simple. Let’s say you get a credit card with an interest rate of 20%. You use your credit card to spend $100.00 at the mall for an outfit or shoes. If you pay back the full $100.00 within a month you may not be charged interest, depending on the company and your contract. However if you do not then you will be charged 20% interest on your $100.00, which equals $20.00. So to sum it up you just paid $120.00 to spend $100.00.
Now this may not be bad if you are looking at it short term, but if spend $1000.00 on your credit card in a year and paid interest, then you just spent $200.00 on interest. There is a good way to establish credit. Only use your credit card when you have the cash to buy something. Sound dumb?
Not really, you see credit simply shows that if you borrow money you are ‘good for it’ or can pay it back. Back to the strategy, by purchasing something when you have the cash you are going to pay it back within the month, and hopefully avoid paying interest. So essentially you are showing that you can pay back what you borrow and this is one thing that establishes good credit.
Minimum payment myth
When you get your monthly credit card bill it will show your minimum monthly payment. Depending on your balance (the amount you owe), the minimum payment will usually be very low. So you think to yourself ‘Wow, I have a $1,000.00 balance and I only have to pay $50 a month; that is great!’ But it isn’t great because you are only paying back the interest. The principal is amount you borrowed before interest is added and that is what you want to pay off. By paying the minimum payment, the credit card companies are making money off of you because your balance will not go down; it may actually go up.
Do yourself a favor and pay at least double the minimum payment each month. Otherwise, you will be paying for a very long time and your balance will not go down.
Avoid the temptation to ‘save’, it will cost you
Be careful about multiple credit cards; the best is to have one, maybe two for emergencies like car repairs etc. This will be challenging since now practically every store has its own credit card and they get you buy saying ‘you can save 10% percent today if you apply for our credit card’.
I am mainly speaking from experience when I tell you that if you mess up your credit, it can take a long time to fix. I made my mistakes as a college student, but have since repaired the damage and learned a lot along the way. There are a number of good sources of information if you have questions; you can contact local credit counseling agencies or check out sites on the web like American Credit Counselors at www.americancredit.org
I know this may not seem like the most exciting of topics, but trust me when I tell you that guarding this aspect of your life now will benefit you greatly in the future. On the other hand, neglecting your credit will lead to headaches and hardships beyond what you could imagine.
Next article I will talk about guarding an equally important part of you, your heart. ¡Hasta la próxima vez!
I would love to hear from you about my column please send me feedback or let me know if there is something you would like me to write about. You can e-mail me at [email protected] ¡Gracias por tu apoyo!