Yahoo Finance 4 Credit Lessons Every Graduate Must Know
Terror.
That's exactly what countless college and high school graduates feel once their mortar boards and gowns are put away and the post-graduation parties end. Sure, the lucky ones will quickly transition into great jobs, and others will take that foreign backpacking trip they've always dreamed of. Those folks, however, are a fortunate few.
For many graduates, life after high school or college is quickly followed by an abrupt, unnerving move into The Real World. Part of that reality is they might not be able to get by without a credit card. That can be downright terrifying, especially if you don't know how to handle that card. And many students don't.
The truth is that using credit is easier than you might imagine. Here are some simple lessons every graduate should know about how to handle credit.
1. Interest grows faster than you'd believe.
Say you have $1,000 in debt on a credit card with a 19.9 percent interest rate. If you just make the minimum payment on the card, it will cost you nearly $600 in interest to pay that debt and it will take you more than five years to pay it off. You don't have to be a math major to know that's a bad deal.
That scenario assumes you don't make any new purchases as you're paying off your debt. Mix in a flight home to see mom and dad, a nice dinner with your girlfriend and tickets to see your alma mater's big football game and things can accelerate quickly. Suddenly that $1,000 debt is up to $3,000 or $4,000.
Miss a few payments, and that's when things can really get out of control. If you're 60 days late with a payment, your bank can hit you with a penalty interest rate. Those can be as high as 30 percent, which is like pouring gasoline on the fire that is your debt.
The good news is that there's a simple fix to battle high interest rates: paying off your balance in full every single month. If you do that, you'll never pay any interest on your debt, and that high interest rate won't even matter.
2. Budgeting and tracking are the keys.
When I was deep in credit card debt in the years after my college graduation, I put nearly everything I made, outside of what went to essential bills, toward getting out of that debt hole. I was able to do it, in part, because I had a good feel for exactly what I spent in a given month. Without that, it would have made the process far longer.
But how do you get started? First, write down how much money you take in each month. Next, take a week or two and write down everything you spend money on. That means every single thing -- even that Monster you get at the convenience store every morning. You'll probably be shocked to see how many things you're spending your money on, but it's critical to know and to face that spending head on. Combine that day-to-day spending with other regular bills, such as student loan payments or rent, to complete your spending picture.
Once you have all that information gathered, prioritize your spending in order to create a budget that allows you to put the most money toward your debt each month. See what you can live without -- cable, fast food, concerts -- in the name of debt reduction.
But also don't forget the income part of the equation. Consider starting a side gig. Think about selling something that's just gathering dust in a closet. It can all make a difference.
3. It's easier with help.
This isn't about financial help -- though it would certainly be welcomed. This is about emotional and behavioral support from friends and family.
When you need to make a change, it's immeasurably easier if those close to you support you and help along the way. Have friends who are always out shopping or going to too-nice restaurants? Steer clear for a while. Or better yet, share your story with a trusted relative or friend, and let that person be your emotional support.
It's tough -- and embarrassing -- to tell people about your financial problems. That's the last thing many people want to do. The reality, however, is that these types of problems are much easier to tackle when you feel like you have a team of people cheering you on every step of the way.
4. You can make credit work for you.
Your first credit card after graduation probably won't have a low interest rate or a large sign-up bonus. Heck, you might even have to put down a security deposit to get it. Meanwhile, the cards with the best perks are reserved for people who have already shown they can handle credit.
Here's the good news, though: While you're paying your dues -- making timely payments, keeping debts low -- in hopes of eventually graduating to a card with a 12 percent APR or a 50,000-mile sign-up bonus, there are some rewards you can get. For example, the Discover It for Students card offers a $20 cash-back bonus as well as 5 percent cash back in categories that change each quarter. That's not going to make you rich or pay off your student loan debt, but every little bit helps.
The key to success with these cards -- and with any credit card -- is to make sure you pay your balance off each month, on-time and in full. If you don't, those high interest rates will kick in and the math will work against you very quickly.
Matt Schulz is the senior industry analyst at CreditCards.com, a site dedicated to helping people make smart decisions about obtaining and using credit. You can follow him on Twitter at @matthewschulz.
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