Establishing Your Credit Record
It is to your advantage to build a good, solid credit history. Employers sometimes look at a potential employee’s credit report to help them determine how responsible that individual is. Your credit history will be examined when you rent an apartment or apply for an auto or home loan.
You need a positive credit history to prove you are a financially responsible person. If you ever mess up—for example, are late with a payment or miss one altogether—it may be reported to one or all of the major credit bureaus. It could take years to get a negative item off your credit report. So it is important not only to establish a credit history, but also to keep it unblemished.
- The Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009, requires anyone under 21 who wishes to apply for a credit card to prove a source of income or to have a responsible adult cosigner. Any changes to credit limits or other terms on the account must be approved by both the cardholder and the cosigner. The intention here is to help prevent young adults from getting in over their heads with credit card debt.
- You may want to start with a credit card from your favorite clothing store. This could be the easiest card for you to get, but it is also the worst type of card to have if you carry a balance. Only get this type of card if you know you will be paying the total balance due in full and on time. The interest rate could be more than twice that of a major credit card company.
- You want the lowest interest rate.
- You do not want to pay an annual fee.
- Know every category of interest charges. For instance, you are charged a higher interest rate on cash advances than on regular purchases.
- Make absolutely sure you are credit card savvy. Be happy if you receive a low credit limit, and do not be fooled into thinking you have the amount of your credit limit. You do not, or you would not be charging. That is just one way credit card debt can sneak up on you and get a strong hold over you. (Again, please remember: if you don’t have the real money, don’t use the plastic.)
- Be extra careful of “special low introductory rates,” “payment holidays,” and balance transfers. They are designed to keep your balance as large as possible when your introductory or promotional interest rate expires. Having a large balance on your card when the low rate expires is not a good thing! Your next rate is going to be significantly higher. Then you may be tempted to open another credit card account and transfer the old balance. There will be balance transfer fees involved. It can turn into a vicious circle. If you havent been responsible with one credit card, please do not open another. Not only does having more credit increase your chances of getting in over your head, but having too much credit can sometimes work against you. Often banks are reluctant to give loans to people who have large lines of open credit.
- You may be offered a secured credit card. A secured credit card is one in which you have funds on deposit with the issuer of the card in the amount of your credit limit. This money acts as security in the event that you are late with or miss a payment. Before you open a secured credit card account, make sure the issuing company will let you switch to a regular account after a reasonable period of time, usually six months. Also make sure the bank will report your on-time payments to the credit bureaus. These reports will help build your credit rating. If you decide on a secured card, try to find a secured card that does not charge a fee to open the account.
- Be careful not only with your real credit card, but also with the virtual use of your credit card. Do not include the card number in any e-mail message and do not shop from an Internet merchant that does not claim to be on a secure server. Secure websites use encryption software designed to prevent identity theft. Check for a lock icon in your browser’s address bar and look for an s at the end of http. in the URL.
Don’t be in a rush to get all the credit you can qualify for. Build your credit record slowly. Obtain only one or two credit cards. Find low fixed rates. Stay with a low credit limit, and forget you have the cards.
Paying Your Bills
Most of your bills will be on a monthly cycle. This means your rent, phone, credit card payments, and so forth will all need to be paid every single month. Some billings are every two or three months (such as gas, water, trash, etc.), depending on your situation and location.
Then there are the bills that may be due quarterly or semiannually, like insurance premiums. They arrive just about the time you forget all about them. Bills arriving at different times may not be a problem if you always have more than enough money in your accounts to pay them. For those who cut it close every month, balancing the bills can require skill and attention.
- Anticipate not only your monthly bills, but all the bills that will be due in the near future. Don’t spend extra money one month because there is no utility bill, only to find you are short when the utility bill does arrive. Plan ahead. Mentally take something out of your checking account every month to cover a bimonthly or quarterly bill. You may even want to subtract the amount from your check register to fool yourself, so you won’t spend the money you will be needing.
- Try to pay the bills that are accruing interest as soon as they arrive. Credit card interest is calculated on your average daily balance, so don’t let money sit in your checking account while you wait for the statement due date. Pay them as quickly as you can. If you are carrying a credit card balance and have extra money, make an additional payment any time during the month.
- For whatever reason, you may be tempted to leave your money in your account until the last possible moment before paying your bills. That may be fine, but misjudging once and incurring a late charge can be detrimental to your wallet as well as your credit report. Be smart about it and make all payments at least a week before they are due.
- If you have an interest-bearing checking account, you may be tempted to leave your money in the account until the last possible moment before paying your bills. That may be fine if you are good at it, but misjudging once and incurring a late charge can eat up more than an entire years worth of interest earnings. Be smart about it and mail all payments at least a week before they are due.
- Do not pay your bills by mailing cash.
- Don’t forget—be good to yourself and pay yourself first!
Loaning and Borrowing Money
Loaning Your Money
There’s an old saying that goes something like this: Don’t ever loan anyone more money than you can afford to lose. Chances are good that you won’t get your money back. Only you can decide if loaning money to someone you know is the right thing to do. You’ll need to consider what the loan will do to your own personal financial situation.
What will the loan do to the relationship you have with the person who wants the loan? Is it possible the loan could put a strain on the relationship? Do you feel pressured into making the loan? Were you put on the spot? If you decide that you want to loan someone money (and it’s more than just a couple of bucks), it is reasonable to ask the person to sign a promissory note.
You can get one at most office supply stores. Include the amount borrowed, the amount of the monthly repayment, and the amount of interest the person will pay for the loan. If your friend refuses to sign the note and says something like, “You know I’ll pay you back,” etc. reconsider loaning the money. Trust your instincts.
There should be a really good reason before you ever make a large purchase with your credit card for a friend. Your friend is not being respectful of you if he or she asks you to charge the purchase and tells you, “Don’t worry, I’ll make the payments.” Chances are you will end up having to worry about it, every month as you have to track down the payment. Forget it.
It is natural to want to help your family and friends when they need your help. Yet, do it within reason. Like every other decision you make with your money, consider loaning money to anyone very carefully.
Borrowing Money
Owing money to anyone is carrying a burden. Although it may sound like a great idea at a time when you need extra money, borrowing money from relatives and friends can be even more of a burden than having institutional debt, like credit card debt or a bank loan.
Getting a loan from someone you know may change the relationship. A friend may begin to resent you for owing her money, even if it was her idea to loan you the money in the first place!
If you must borrow money from family or friends, make sure you treat the loan the same way you would an institutional loan. Be responsible. Sign a promissory note. Meet or exceed the agreed-upon repayment schedule, and get rid of the obligation as soon as possible.
Payday Loan or Advance
Essentially, these businesses operate by giving you cash in advance of your paycheck. Note that the common cost of borrowing $100 dollars is $15. By calculating this into an annual percentage rate of about 400%, it’s easy to see that these loans are not in your best interest. Never get involved with these cash advances unless it is a true emergency and you have absolutely no alternative. Even then, borrow only as much as you can afford to pay with your next paycheck, and make sure you still have enough left over to make it to the following payday.
Using Your Financial Know-How
Your Taxes
Internal Revenue Services
When you figure your tax form, you will determine if you owe the U.S. Treasury any money or if the Treasury owes you a refund. During the year, your employer typically takes out a set amount from your paycheck every pay period.
This amount is determined by the withholding information you provided on your W-4 form when you were hired. You may find the amount taken out was too much (and you get a refund), or you may need to write a check to the U.S. Treasury for the difference between what was taken out of your wages by your employer (or paid) and what you owe.
Using Your Financial Know-How
Because it is so easy to crash and burn on the personal finance obstacle course, many people do. Plenty of adults would love the opportunity to start their financial life over again. While it’s not quite possible to go back and have a financial do-over, many people do spend years trying to straighten out the financial mess they’ve made.
This chapter was designed to prevent you from having a financial blow-out and will help start you on the right course—mainly, not to make a mess of your finances before you really even get going. Cleverer, funnier, and cooler marketing campaigns entice us to spend, spend, and spend some more.
Credit card companies try to seduce us, and our economy-driven culture tries to sell us on the erroneous idea that our personal net-worth equates to our personal self-worth. You know better!
Wearing the designer label of the moment may be great if you can afford it, but you are not less of a person if you shop at a discount store. As a matter of fact, I know several millionaires who faithfully shop at discount stores and clip coupons, too!
Spending money on yourself and those you love is a wonderful thing, but only if you can afford to do so. Spending more than you should and trying to support a lifestyle you really can’t afford are the quickest ways to fall into financial trouble.
How do you know how to make the right moves with your money? Gain financial knowledge and practice putting that knowledge to work in your everyday life. Read everything you can about money management and the energy of money. Go to the library and read the monthly money magazines.
Ask for advice from the people in your life who appear to be managing their money successfully. You may be surprised at what you hear. You will benefit by hearing the mistakes others have made and from learning the strategies that others have found helpful.
Many interesting Internet sites offer useful information to help you manage your money. You may want to start with these:
- Alliance Credit Counseling: This non-profit service organization offers easy-to-understand information on many money management skills.
- America Saves: Useful information on saving money and building personal wealth.
- Choose to Save Education Program.
- Federal Reserve–Personal Financial Education.
- National Endowment for Financial Education, 303.741.6333.
- Smart About Money: Offers information on a broad range of financial topics to help you make positive financial decisions and to reach your financial goals.
- Feed the Pig:
- U.S. Financial Literacy and Education Commission.
- Women’s Institute for Financial Education, 760.736.1660.
Hint: There are several popular software programs available to help you handle your money, including the current edition of Quicken.
No matter who you are, making informed decisions about what you do with your money will help build a more stable financial future for you and your family.––Alan Greenspan