Credit Basics
Life Lesson 101 For College Grads: Pay Debts
Thursday, May 22, 2003
Kaja Whitehouse
The Boston Globe
How you handle your student loan debt and credit card debt when you're young can impact various aspects of your life from getting a good job and an apartment to affording insurance and a cell phone. And young people usually have the unique opportunity to start off their credit card history with a clean slate, even if they have some black marks on their credit report from college.
At the center of the issue is the credit report, which tracks everyone's performance in paying debts. Missed payments, or consistently making late payments will negatively affect your credit report. Too much damage to your credit report could leave you to having trouble renting an apartment, buying insurance or even getting a checking account.
Take the case of Stacy Betts and Ronnie Armijo, a young couple from Austin,
Texas, who each handled their debts in opposite ways. Armijo, 28, racked up credit card debt during college and had trouble repaying it. The difficulties this caused him after college in "everyday activities" like renting an apartment or a car, made him determined that his fiancee, who is four years younger, not make the same mistakes. The result: Betts has had it much easier. She was able to get a cell phone and rent an apartment right after school, while Armijo was stuck with expensive down-payments or downright rejections.
"Stacy wonders why I harped on it so much while she was in school," he said.
Bad creditcan make life so difficult, he said. "It's embarrassing" not to be able to "rent a car or stay at a hotel because you don't even have a credit card," he said.
Today's college graduates<\a> may be leaving school more debt-laden than ever. According to a 2003 study by Nellie Mae, a national provider of higher-education loans, undergraduate student loan debt has increased 66% since 1997 to $18,900 from $11,400. Meanwhile, credit card debt is also mounting, with the average 2001 credit card balance up 15% from the year prior.
Despite the rising debt levels, most graduates are in a position to get on the list of good debtors, even if they have had some problems, said Howard Dvorkin, president of Consolidated Credit Counseling Service in Fort Lauderdale, Fla. That's because young people usually aren't given enough credit - outside student loans - to do any serious damage, he added.
Indeed, the median credit-card balance, while rising, was only $1,770 in 2001, according to Nellie Mae. And student loans usually come with very low interest rates and monthly payments.
On the flipside, the time right after college can be rife with mistakes because it's generally a period of great change and transition. "You have no experience, and it's your first time trying to manage multiple types of credit," said Conrad Ciccotello, a professor and director of personal financial planning at the Robinson College of Business in Atlanta.
To get right, graduates need to learn basic rules like budgeting and always paying at least the minimum balance on debts. There are also some common mistakes to avoid, like not informing creditors of a new address, putting off payments until you land the perfect job, or only paying the minimum required balance even when there's extra cash around.
The Impact Of Taxes
The most important thing is to always pay your bills. A lot of young graduates think they can put payments off until they find a job, said Rudy Cavanos, a spokesman for Money Management International, a nonprofit debt-education service based in Houston. They have this attitude of, 'I'll get to it when I get to it.' They don't realize that's very damaging."
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It also means keeping in contact with creditors when you move. Young people just starting out tend to do a lot of moving around. But not informing creditors of these changes could cause bills to be late.
One of the most common reasons people fall into debt problems is because they spend beyond their means. To avoid this, develop a budget, or a guide on what you earn and spend.
The best way to know how much you spend is to track expenses daily for 30 days, said Money Management's Cavanos. If you find that you're spending more than you can afford, you will need to cut down on the nonessential expenses like cable television and daily coffees. "It's those little expenses that deplete your money," he said.
Plus, be careful not to base your earnings on gross income, because taxes, Social Security and Medicare will reduce take-home pay by about 25%, said Ciccotello, the business professor.
You may be able to boost after-tax earnings, however, if your employer is withholding too much from your paycheck, said Ciccotello. In times of decreasing income-tax rates, more people may find that what they actually pay in taxes should be far less than what their firms are withholding, he said.
If you take these steps and still feel overwhelmed, find a nonprofit credit counseling agency. For help finding a good credit counselor, look to the Federal Trade Commission guide: Fiscal Fitness: Choosing a Credit Counselor.
The last thing you want to do is file for personal bankruptcy. The rate of young people filing for bankruptcy has been on the rise in recent years, but Cavanos bets many of those filings were a result of people not knowing their options.
Young people usually don't have enough credit card debt to make bankruptcy worthwhile, especially since it doesn't eliminate the burden of student loans. Plus, it ruins your credit report, he said.
(Kaja Whitehouse is one of three Getting Personal columnists who write about personal-finance issues ranging from new tax proposals to education-funding strategies to estate planning.)
-By Kaja Whitehouse, Dow Jones Newswires; 201.938.2243; kaja.whitehouse@dowjones.com
