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The Advantage Advisor

Advantage Advisor

Volume 2, Issue 5, 2007

An open letter to young adults using credit for the first time

Although this is a fictional letter, it hi-lights the importance of using credit wisely and establishing a positive credit history.

Dear Jim,

Wow—I can’t believe you are leaving for college in two weeks. I need to give you some really important advice that I wish someone had told me before I started my freshman year.

I don’t want you to end up spending $12,800 on the “free” beach towel you’ll get when you sign up for your first credit card. That’s what happened to me and I’m still paying it off eight years later! Don’t tell mom and dad or they’ll kill me.

You may have already run into the credit card booths all over campus when you were at orientation. I hope you didn’t sign up for any credit cards yet. Don’t just sign up for a credit card to get the freebie that goes with it. I mean, really Jim, how often do you think you are going to wear the t-shirt or use the Frisbee or mug? If you take advantage of every free offer, you’ll end up with 15 credit cards and the potential to get into big credit trouble.

It’s a good idea to get one credit card so you can start to establish a credit history. Make sure you tell yourself it’s only for emergencies or for things that you’ll pay off when the bill comes. I know how you can be, so remember, PIZZA IS NOT AN EMERGENCY! Take it from someone who justified charging more things than I ever should have—if you can wear it, drink it or eat it, then it’s probably not an emergency.

When you use credit, you are borrowing someone else’s money — the credit card company’s — and promising to pay it back with future earnings. Mom told me you are planning on working a whopping eight hours a week. Think about that before you charge. If you don’t have the money to pay it back when the bill comes, then don’t charge it. Believe me, it’s easy to get sucked in to using credit cards for everything and worrying about how you’ll pay for it later. What happens when later comes and you don’t have the money to pay for it, dear brother? Another thing, just because a creditor offers you a certain credit limit doesn’t mean that you should spend up to that limit.

Think back to second grade social studies when Ms. Pierce taught you about wants and needs.

Yeah, I know, you need to have fun, but you don’t need a $500 video game system. Try to keep in mind that your spending needs to be realistic and in line with what you make at the bookstore and with what mom is going to give you. (You know she is)!

You want to do everything you can to start to build a positive credit history now so you can rent an apartment, get reasonable car insurance and get the job you want in the future. Always pay your bills on time and never go over your limit. Don’t take cash advances on credit cards—you’ll pay higher interest and fees. It isn’t just creditors looking at your credit report. It’s landlords, employers, utility companies and insurance companies. You don’t want to have to move back in with mom and dad after graduation, do you? That’s why I had to move back home after graduation. The first job I had didn’t pay enough to pay my student loans, rent, car payment, insurance and credit card debt. I couldn’t afford to live on my own. And look how long it took me to move out!

The best thing to do is to stay out of debt in the first place. You don’t want to have to dig out of a credit hole like I did.

Love,

Jane

Dear Debt Monkey

Q: I have a charge-off account on my credit report. What is a charge-off and do I have to pay it?

A: A charge off is a severely delinquent debt that has been written off as a loss by the creditor. The debt is still legally valid, meaning you are responsible for paying the debt.

A charge-off is the number one reason for being denied credit. A charge-off will remain on your credit report for seven years plus 180 days from the date of the first non-payment. An unpaid charge-off can prevent you from qualifying for a mortgage or other loans. Paying the balance on a charge-off account does not remove it from your credit report, but rather the status is updated to ‘paid charge-off.’

If you have a charge-off account or other debt issues and you need advice, call us.

1-888-511-2227

Tips on re-establishing credit

Pay your bills on time.
Open and maintain checking and savings accounts.
Pay down your debt.
Make sure your credit report is accurate.
Don’t apply for too many credit cards at once.
Consider a secured credit card.
Devise a budget to ensure new credit purchases are affordable.

The Basics of Budgeting

When someone utters the word ‘budgeting’ it is enough to make even the best of us start to sweat. Budgeting really does get a bad rap and it is difficult to figure out why. A budget is nothing more than a spending plan. A budget offers a blueprint of where your money will be going before it ever leaves your checking account. The biggest challenge we face when it comes to budgeting is that we have no idea how to even begin using a budget. Let’s examine a few simple steps.

The first step to starting a budget is to compute your income. It is important to calculate income from ALL sources.
The second step is to add up your monthly expenses.
The third step is to track your expenses. By tracking your expenses, it is easy to see where your money is going as well as identify areas where you can cut back.
The final step is to analyze your spending versus your income. If your expenses are equal to or less than your income, then you are on the right track. You should continue to monitor your spending and make adjustments as necessary. If your expenses exceed your income, you will need to take action.

For more information about budgeting, please call our Education Department, toll-free at (888) 511-2227, ext. 145 for a free Budgeting Basics book. For additional step-by-step budgeting guidance, visit our website at www.advantageccs.org. To schedule a free budget counseling session, call: (888) 511-2227.

Additional Budgeting Tips:

Most people underestimate how much they spend on groceries. It is important to closely track your spending in this category. Remember to include discount warehouse purchases, return trips to the store for forgotten items and personal care items.
Allow several months for your budget to really start working for you.

Did You Know?...

A secured credit card is an option for individuals with a limited credit history and/or credit problems who do not qualify for a regular credit card. A secured credit card can be a great way to establish or re-establish credit.

Secured credit cards require a cash collateral deposit (like a security deposit) that becomes your credit line. It pays to shop around for the best deal because most secured credit cards carry an annual fee and require a minimum deposit for you to set up the account.

Remember, always read the fine print so you know exactly what you are getting into with a secured credit card. For more information, visit: www.bankrate.com.

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