Learning about Credit Is Important For College ... - The Finance Zone

Learning about Credit Is Important For College Students

As a college student, it is fair to say that money is not available in abundance. As a result, more and more of life?s necessities are being obtained via credit. Millions of students across the US are taking out credit to pay for a variety of things, from buying furniture and clothing to paying for school tuition. Credit can be your best friend; however, it can also be your worst enemy. This is why it is important for all college students to learn about credit, the undeniable benefits and the hidden dangers.

What is credit?

Credit is basically something that gives you the chance to buy now and pay later. It is a very powerful tool.

There are different ways to obtain credit, via a loan or credit card. Loans are when a person borrows money for a specific purpose, for instance, to buy a car or pay for college tuition. The required amount is borrowed and then repaid over installments.

There are generally two types of loan: secured and unsecured loans. Secured loans are guaranteed by a form of collateral, which is valued at equal to, or more than the loan, for example, a house or a car. Unsecured loans are given to a person based on credit score and their ability to make payments.

Credit cards will be familiar to most people and are the most common form of credit ? especially for students. Credit cards are given with a maximum spending limit and allow unlimited number of transactions within the limit. Each time a credit card is used, a person is borrowing money which they will then need to pay back. If this is done over a period of time, interest will be added.

The disadvantages of credit

The benefits of credit are there for all to see ? giving you money to spend as and when you need it. The disadvantages are not so clear and this is what affects a lot of students.

Credit encourages overspending. Students that are not used to having so much money available to them tend to spend more than they earn, which inevitably leads to debt. When monthly repayments cannot be made, interest mounts up and the money owed back to creditors can spiral into hundreds, even thousands of dollars. This will then affect your credit score, which tells lenders how creditworthy you are.

Finance and interest charges often amount to a large part of the credit a person obtains, and the rate of which the interest is charged is generally small print. When a payment is made on a credit line, interest and finance charges are paid first, this means nothing is paid towards the actual amount borrowed. Around three-quarters of every monthly payment is taken up by interest, resulting in longer pay-off periods. For people with established credit, they may be able to get lower rates or promotional zero percent card offers to reduce their financing charges, but these options are limited with college students.

Credit is readily available, and often essential to students. When used properly, loans and credit cards can be put to great use; however, improper use can be a life of financial hardship. As a student, it is important to learn the ins and outs of credit before taking the plunge.

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