Taking Charge of Credit Cards
If you haven't started already, you will probably start building your credit history while you are in college. Your
credit history begins as soon as you take out a loan. The loan can be in many forms: a student loan, a car loan, or a credit
card. Your timeliness in paying back your loan is reflected in your credit score—a grade that measures how reliable
you are with paying back your debt.
Understanding the Credit Score
The credit score takes into account your repayment track record, the amount of debt you owe, your history with debt,
how often you apply for credit, and the types of credit you use. It helps lenders determine how risky it is to lend money
to you, which can influence your interest rate and whether or not you qualify for certain types of loans.
When does your credit score matter? Lenders may look at your credit score every time you do one of the following:
- Buy a car or a home
- Set up phone or utilities
- Rent an apartment
- Apply for a job
Understanding your interest rate
The interest rate is your cost for borrowing. Paying your bill in full by the payment deadline results in a cost savings
for you, the borrower, because you will not be charged any interest. By deferring full payment, however, you will begin to
incur interest charges based on a percentage of your overdue monthly balance (this percentage is your set interest rate).
Regardless of your cost of borrowing, you will always be required to make a minimum monthly payment.
Controlling your costs
The amount you will pay in interest will be determined by two factors: the assigned value of your rate and the amount
of your overdue bill. These factors suggest:
- You should be aware of the rate value assigned to you; this helps you know what percentage of your bill you will be
paying in interest costs before you spend; and
- You should be aware of how much you are spending; the more you owe, the more you will pay in interest costs, and therefore, you should only spend what you know you can pay back, including interest.
Securing your future
Your credit rating is important to your future. Use your credit sparingly, and keep your spending within your credit
limit. If you encounter financial difficulty, talk to your lender and work out a payment plan. Then, pay off your balance in
a timely manner so that you avoid financial penalties. Only borrow what you need.
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Budgeting and Good Record-Keeping
Planning a budget helps you spend only the money that you have—it helps you make sure that your expenses are not
greater than your income. Smart budgeting means keeping track of what you spend as well as what you earn. To start, you'll
need to list your monthly expenses—and be honest about what you're using your money for.
Don't forget the following categories:
- Car payment
- Dining Out
- Medical expenses
Keep track of what you spend for one month. You'll be surprised how much entertainment costs. One $4 latte per day ends up
costing $20 per week and $80 per month!
Meeting your goals
Once you've tracked your expenses, prioritize them and take notes on where you can cut back. For example, share your
living space with a roommate to cut rent expenses in half. Make a list before going grocery shopping to help avoid impulse
buys. Talk with your parents about joining in with car insurance or cell phone plans to reduce monthly premiums. Buy used
textbooks, and use public transportation if available. There are many ways to cut costs and make college more affordable.
Make a plan to balance your budget and start saving.
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The Basics of Loan Repayment
How to Borrow Less in the Long Run
Interest expenses can cause loans to become more expensive over time. A small change in the initial principle amount of
the loan can result in a large difference in the total cost of the loan.
For example, a student borrows $3,000 at 6.8% interest in a Federal Unsubsidized Stafford Loan. If he pays $50 per month
after graduation, his total cost becomes $3,676 because of the interest costs. If he reduces the amount borrowed to $2,700,
the total cost drops to $3,192. The small adjustment in the principle makes a big difference over time.
Avoiding Interest Costs
One way to avoid costly interest payments is to use work income to supplement loan income. If the student mentioned above
worked a part-time job over the summer and saved $1,500, he would only need to borrow $1,500 to earn the $3,000 he needs.
A $1,500 loan at 6.8% costs $1,649. This student saved $149 by saving his work income instead of borrowing a loan.
Subsidized loans are also the most inexpensive type of student loan. When shopping for loan options, choose subsidized loans
over unsubsidized because it means that the lender is subsidizing interest payments. In other words, during deferment,
the lender pays part of the interest on the borrower's behalf. Less interest charges accrue, and the total cost of the loan
Loan calculators are useful for comparing repayment plans and interest rate options. The following links are handy tools for student loan borrowers:
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