These are tough financial times, and few people have been hit as hard as those in their twenties. More than ever, young people are finding themselves in debt. The average debt of an American college graduate is nearly $30,000, and the high rates of unemployment around the world may lead many more young people into debt. Whether you’re already in debt or lucky enough to be debt-free, it’s important to know what credit is and how debt affects it. Many young people are uneducated or misinformed about their financial options. Stay on top of your finances and protect your credit and your future by learning the truth about these monetary myths.
Myth #1: I don’t need credit.
Your ‘credit,’ or ‘creditworthiness,’ is basically a prediction of how likely you are to pay back debts. Good credit means that you will almost certainly pay back debts in full and in a timely manner. People with good credit are considered more trustworthy by lenders, and will get lower interest rates on loans and credit cards. People with bad credit typically have a history of not paying their loans back on time; this means that creditors see them as ‘untrustworthy’ with money. People with bad credit will have high interest rates or a denial of the loan altogether.
Having good credit is extremely important. Credit checks are performed when opening new bank accounts, when trying to get loans and mortgages, and sometimes even when applying for housing and jobs. You don’t start with good or bad credit; you simply have no credit. Having no credit almost the same as having bad credit, and you will still have a hard time getting loans or housing. Young people must build good credit over time, using tools like student loans and credit cards.
Myth #2: It doesn’t matter if I forget to pay my student loan debts on time.
In America, the national student loan debt is now larger than the national credit card debt—more than $1.1 trillion dollars. Many other nations also offer student loans, which have a lower interest rate than regular loans, to students who cannot afford higher education on their own.
After a grace period, usually six months after graduation, you must begin paying back your student loans. If you forget a payment, you will be charged a late fee and your credit will be negatively affected. If you are having trouble paying your loans or you simply cannot afford them at the time, call your lending company and see if there are any student loan refinance options that you can take advantage of. Explain your financial hardship and these companies will work with you to set up a payment plan that you can afford. They may even extend your grace period to allow you to get back on your feet before payments resume.
Myth #3: I can get rid of my student loan debts without paying them.
Unlike most other types of debt, which can be shed via the unpleasant process of bankruptcy, student loan debt is almost never forgiven under any circumstances. If you don’t make your payments, your loan will go into default. Defaulting on a loan can cause serious legal issues and will destroy your credit rating, which means that if you need to get a loan in the future (such as a mortgage or a car loan) you’ll pay exorbitant interest rates or be denied altogether.
If you have trouble paying your loans, call your lender immediately and ask for help. They’d rather get their money more slowly than not get it at all.
Myth #4: Credit cards are evil and will double my debt.
Credit cards aren’t evil, and are a useful tool in building good credit. Many also offer useful money-saving rewards, such as airline miles or cash back. But like any tool, credit cards must be used correctly.
It’s easy to avoid paying interest on credit cards—just pay off the balance every month! If you pay the full balance each month, you’ll only be giving back what you borrowed, with no extra.
Unfortunately, many people either aren’t well-educated about credit cards or can’t afford to pay off the full balance every month. These people also tend to have poor credit, which forces them into cards with higher interest rates. They usually end up paying a lot of extra money in interest and late fees. Educate yourself, make payments on time, and don’t borrow more money than you can pay back in the next month, and you’ll never have to pay interest or late fees.
