Effectively managing our debt burden is one of the most important
things we will do during course of our lives.
This is the first goal area we discuss in Mapping Your Life’s Success because
it is very easy for young adults to get out on their own and dig a hole that
they have a very hard time getting out of.
All borrowing and
credit activity should be strategic and thought out.
For most people there are two major debt necessities –
home and automobile ownership. You can’t
just go out and get these kinds of loans without a GOOD credit history. If at all possible, any credit activity prior
to these purchases is done strategically in a way to “build” our credit.
A mortgage is a long arching debt commitment of up to 30
years. Automobile ownership usually
consists of rolling periods of debt to pay a vehicle off followed by periods of
no payments until you need to purchase a new vehicle. Generally, your positive credit history on a
car loan becomes the gateway to being able to get approved for a mortgage.
Beyond home and vehicle ownership we have to be extremely
careful about any long term debt that we bring into our lives. One example of debt that could have a
positive cost benefit is borrowing money for post-secondary education.
If we are able to sit down, do the math and see that we
can make a good enough salary by attaining a vocational, business or college
degree, this can be a good investment into our long term earning potential.
However, with long standing wage suppression and the ever
increasing costs of post-secondary education you need to be very cautious about
this investment. Tread carefully and
make sure that there will either be a real cost/benefit
or that this is something that will put you into a career that is very
important to you.
You should also take the time to look into and exhaust
all financial assistance that might be available.
By far, the biggest mistake young adults can make is
allowing themselves to fall into the black hole of rolling credit card
debt. Nearly anyone with a job can
attain a credit card. Too often we don’t
understand how much money credit cards make off of us for the issuer.
Credit cards tap you hard in two ways – high interests
rates (the fee for the service) AND by spreading payments out over an
extraordinary long period of time. This
works to further maximize the high interest rates.
If you have $2,000 in debt on a credit card with 20%
interest it will take 15 years to pay it off making the minimum monthly
payment. When it is all said and done you will have paid $4,240 for the $2,000
the credit card company gave you, more than twice the value of what you
purchased.
It is important enough to say more than once – if you do
not have the means and discipline to pay bills off at the end of the month you
should never make non-essential purchases with a credit card. Budget savings for the item you are seeking
to purchase and wait until you have enough money to pay in full.
Being enticed into
rolling, high interest credit card debt is the primary financial trap facing
young adults. We have a very finite
amount of money that we will earn in our lives.
It simply is a mistake to pay over twice the cost of a purchase for an
electronic device or clothing by using a credit card instead of waiting or
finding a way to pay cash.
When it comes to your credit score, the two key things to
remember are:
1) it is a lot easier to do damage to your credit score
than to “fix” it once it is damaged.
Better to have a limited credit history than a bad credit history.
2) Making payments on time and not having too much debt
are extremely important factors in your credit score. This further emphasizes the need to be
careful and strategic about your use of credit.
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