Understanding Credit and Debt

Credit and Credit Scores

Your credit score is a report used by different institutions to measure your current debt and payment history. Keeping a good credit score is important to ensure that you can obtain loans with lower interest rates in the future. Your credit score can affect your ability to buy a car, land a job, get a mortgage and even rent an apartment. You can check your credit score for free once a year from each of the three major credit bureaus: Equifax, Experian, TransUnion. Also remember that your credit score is not affected when you check it.

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However, credit comes with pitfalls such as high interest rates and annual fees. If you don’t plan accordingly or are not realistic about what you borrow, you may create a snowball effect that is hard to stop.

Tools to manage and understand credit:

Debt

College is a great time to develop positive habits to help you stay out of debt. Since many students do not work full-time or have all expenses covered, many find it difficult to keep their borrowing under control.

Good Debt vs. Bad Debt

All debts, both good and bad, have some form of risk. When you have good debt, your financial risk is low and your chances of making money are high, such as with student loans or a car loan. Student loans are considered good debt since you are investing in yourself and have a greater potential for a higher paying job. However, these debts are only considered good if you are able to pay the monthly payments and are not falling behind on other bills.

Conversely, bad debt occurs  when you borrow for items that immediately decrease in value. Some examples of bad debts are using a credit card for eating out, clothing, or entertainment. When you incur bad debt, you take on risk in exchange for something that loses value within moments of purchase.