To Your Credit
July 26, 2022
Contact: Rhonda Jessup, Director of Public Relations
The following article was written by Waylon Woodall, University of Mount Olive Instructor of Accounting. With students heading off to college, it is both timely and informative.
In my not so distant past, I embarked on the journey that all of us must take as we transition into adulthood – that of independent decision-making.
In high school, my parents began to allow me more freedom to make my own choices – choices of who I associated with, what I did in my free time, and how I spent the money I made from my part-time summer job. This trek into independent decision-making didn’t happen overnight. It was more gradual. My parents slowly began to grant me more freedom as I became older and more experienced.
At first, this was a bit frustrating. As is the case with most of us in our teenage years, I was initially over-confident that I had all I needed to govern my own actions. Looking back I am grateful for the measured, steady approach my parents took. I quickly realized throughout college and early adulthood that with great power (or freedom) comes great responsibility.
My hope for this article is twofold and is directed specifically toward our students. First, in many cases your parents ultimately want what is best for you. Second, allow this article to point you closer to financial success by increasing your financial awareness – specifically your awareness surrounding the use of credit.
Let’s Talk Credit Cards and Debt
If that heading makes you a little uncomfortable, you aren’t the only one! According to a 2021 survey completed by Bankrate.com, only 59% of Generation Z feel comfortable talking about credit card debt (Staples, 2022). Regardless of your comfort level, understanding credit cards and debt is vital in helping you achieve financial freedom.
Credit Card/Debt Key Points:
1) Your credit score is important – and affects more than you think.
Credit scores help all relevant parties within a functioning economy understand each individual’s likelihood to pay his or her debts in a timely, consistent manner. The relevant parties include lenders for home and auto loans, credit card companies, and potential employers. The individuals include me, you, and every other person who is in need of credit (or loaned money) at some point in his or her life. It is important to understand and build your credit score as early as you can.
A few easy ways to start building your score in college are by paying your own rent, paying your own student loans, becoming an authorized user on your family’s credit cards, or making payments on your own credit cards in full and on time. Building and maintaining a good credit score while you are in college can have a major impact on securing lower interest rates on loans for future home and vehicle purchases, as well as landing your first job.
The Bottom Line: All the relevant parties mentioned above want to know you are reliable. Your credit score is their way to measure that. With a little effort and strategy, building a solid credit score will benefit you greatly in the future.
2) “Interest”-ingly enough, the loaned money itself isn’t the worst part.
Most rational lenders will not lend money without expecting something in return for the use of their money. This is true of major corporations lending to market investors, banks lending to a new home owner, and credit card companies issuing credit to the everyday consumer. In essence, the profit lenders expect from the use of their money is known as interest. To illustrate how this interest works specifically for credit cards, consider the following example:
You obtain a new credit card with 17% purchase APR (annual percentage rate) interest rate. At the end of the month, you are carrying a balance due on your card of $3,000. To determine the interest you will start to accrue, first divide your APR (17%) by 365 days – this gives you a daily interest rate of 0.0466%. With your current carried balance of $3,000, you would accrue $1.39 of interest per day. Assuming you don’t add to your $3,000 balance over the next billing cycle of 30 days, you would accrue total interest charges of $41.70 within one month’s time. (This isn’t even using daily compounding, which would recalculate interest charges every day based on your balance due plus each prior day of interest). However, this still gives us a close estimate of how quickly interest charges can add up over time.
You can see how this starts to become an “interest”-ing conundrum. For all debt, but especially for credit cards (since they carry high interest rates and compound daily), it is important to pay your balances in full and on time as much as possible to avoid falling into the never-ending, vicious trap of chasing after the interest on your loans.
The Bottom Line: Be careful about how much credit you take on at one time. When you must use credit, aim for low interest rates where applicable and always target paying your full balance before it is due.
3) MyFinancial Golden Rule: Don’t Bite Off More than You Can Chew
Put another way in the words of Financial Coach Dave Ramsey, “Act your wage.”
It is very tempting to use your credit card to make a Starbucks run for your favorite coffee every morning or to make the purchase of a brand new item you see trending on social media. To make matters worse, it’s easier than ever to make a quick purchase before you have the time to really think about the benefits of your purchase. Many companies have followed Amazon’s lead in helping you discover what you like even before you realize you like it. With a click of a button (or quick credit card swipe) you can make your purchase today with no questions asked.
I make these points not to start discouraging you from enjoying the money that you or your family works hard for. Rather, I want to humbly encourage you to dive deep into your spending behaviors. Uncontrollable debt stems from making more purchases with credit than you can actually afford. For every purchase, it is smart to evaluate multiple criteria that help you determine if that purchase is a worthwhile investment for you. Before each purchase, stop and ask yourself questions that aim for the root of your spending behaviors.
Questions like the following could be helpful for your analysis of what you can chew:
- Do I need this?
- Will this make me happy long-term?
- Why do I want this?
- If I purchase this today, what impact will it have on my future financial goals?
- If I made this purchase (x) times per month, how much would that cost over one year (or five years)?
The more you ask yourself these questions, the more you will understand that we are often swayed very heavily by fleeting, momentary, seasonal emotions. This isn’t necessarily all bad, as I am a believer that you should enjoy the fruits of your labor. However, only to the extent that it doesn’t hinder future fruit-producing abilities. When you start to spend beyond your means by using credit, you begin to eat into your future take-home pay. Before you know it, you have 5 monthly loan/credit payments in addition to your utilities. This leaves you with very little fruit to enjoy.
Many of you are about to enter into worlds of taking on student debt, home loans, and vehicle loans. These situations (while not always ideal), may be necessary ventures into debt where you might not be able to pay them off for five, ten, fifteen, or even thirty years (although I strongly encourage paying off even these debts as quickly as you possibly can). However, if you can help it – please do not let that extend into your use of credit cards. Train your brain to focus on your needs and your long term goals first. Really begin to think about the age old question “Where do you see yourself in five years?” Then think about how to make your goals attainable and timely given your resources and career prospects. Don’t let the shiny items of today distract you from who you want to become in your future.
The Bottom Line: Whether it’s your home loan or your credit card, bite off only what you can chew. Give some thought to your financial future, what you want to be able to afford, and then what you can presently afford.
Bringing It All Home
As a college student, there is so much opportunity that you are right on the edge of attaining. Risk will be a constant neighbor to the opportunities you will chase, and a lot of your life will be a balancing act between the two.
When it comes to your finances you will have choices to make that are surrounded by real risks and opportunities. Like was the case with my journey, these will eventually be choices that you alone (or you and your spouse) have to make.
There is no better time than now to start asking God for wisdom about your future and educating yourself on sound financial principles – and of course, to thank and give credit to those in your life (including your parents) who are helping you become the person you aspire to be.
Staples, Anna (2021, October 13). Gen Z would rather discuss their love life than credit card debt. Retrieved July 21, 2022, from https://www.bankrate.com/finance/credit-cards/gen-z-credit-card-debt/