USING CREDIT
WISELY ADVICE CONSUMER SMART SELF
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To be
smart at money management, we all need to learn
the wise use of credit.
USING
CREDIT WISELY
Society has
for decades now promoted the notion of “buy now,
pay later.” Madison Avenue has also contributed
to this feeling of entitlement by letting
consumers know though their clever advertising
campaigns that each of us deserves the very best
and we deserve it right now, even if we can’t
quite afford it.
Here, you
will learn why we have such poor credit habits,
and what we can do to use credit smartly, and
wisely.
Why do we have a history of poor credit
habits?
Much of this feeling came into play
following World War II. The American people had long been denied some of the
luxuries of life. Even some basic staples such as oil and nylon for hosiery were
restricted as these materials were needed for the war effort.
When the war ended and the baby boom began, so did an era of luxury where
everyone was buying their dream home and filling it with television sets and the
latest deluxe appliances. Automobiles were catering to the family and a sense of
style, and the advertising that went along with these items convinced everyone
that they deserved them right now.
Credit has made many good things possible for people who are working hard each
day to provide for their families. In many other countries around the world home
ownership is only for the very wealthy because there are no mortgage lenders.
This so called American dream is one of the best benefits from a system of
credit. However, there are many pitfalls when it comes to credit. One step in
the wrong direction can not only ruin your credit rating, but could perhaps in
the long run, put you and your family out of your home.
Here are some guidelines for getting smart
about credit:
Buying a House
The general rule of thumb among financial advisors is that buying a primary
residence even on credit is a smart move. Home values quickly rise and in no
time at all you will have created a nice little nest egg. In choosing how much
to borrow, banks will often push you to the limit of what you think you can
afford. Realistically, you should not spend more than about 25-28% of your
income on housing, including taxes and insurance. If you can afford a loan that
is shorter than 30 years or make a little extra payment on the principle each
month, then you are even better off.
Paying for Education
Secondly, financing an education is a good investment in the future. Your
earning potential will eventually outweigh the cost of tuition, and educational
loans are usually very low interest. In addition, with most student loans you do
not need to begin making payments until you have graduated or stopped going to
school. Again, paying it off as quickly as possible upon graduating is the best
scenario.
Buying a Car
Finally, your primary mode of transportation to and from work – a car -- is an
item many people need to finance. It is easy to get caught up in buying more car
than you can afford. A new car loan however should be kept under 5 years, and
under 3 for a used car. This payment should not be more than 10-15% of your
income or you could run into trouble trying to pay for it. Remember also that
the higher the price and value on the car, the higher your property taxes and
insurance will be.
Credit Card Debt
Finally, there is credit card and other consumer debt. This is the worse type of
debt of all. Interest rates on borrowing money this way will be the highest of
any, mostly because there is rarely a tangible item as collateral against it.
The lender can’t take back that expensive meal at the city’s finest restaurant
if you don’t pay the bill.
If you must use credit for a vacation, furniture or other seemingly “must have
now” items, then the general rule is don’t charge or finance anything you can’t
afford to pay off in a year or less. It is also important to pay at least the
minimum payment due PLUS the interest payment, or it could take you as long as
30 years to pay for that dinner out!
To
teach and learn money skills, personal finance, money
management, business education, careers, and life skills, please go to the Money
Instructor home page.
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To be
smart at money management, we all need to learn
the wise use of credit.
To
teach and learn money skills, personal finance, money
management, business education, careers, and life skills, please go to the