Money Management

Types of debt

How you repay debt determines your credit rating, so knowing about the types of debt is important.

Installment loans are for big-ticket items such as cars or homes. Installment loans are paid in monthly fixed amounts and are normally secured (i.e. backed by something of value, such as a car). Payments should be manageable in your budget. Make payments on time as this will help improve your credit
rating.

Credit cards and department store cards are revolving credit lines. Credit cards are heavily marketed and the terms often look better than they really are: Proceed with caution! Credit cards have a monthly payment that varies based upon total amount owed. Poor handling of credit cards can quickly hurt your credit rating.

Student loans are unsecured installment loans. Explore all your financial aid options, focusing first on scholarships and grants that don’t have to be repaid. Borrow only the amount you need to get through college. You will be happy to have a lower student loan payment when you begin your career and want to buy a home and a car. Be realistic about what your salary will be after graduation and estimate the amount of debt you can afford. Ideally, student loan payments should be 10 percent or less of your net monthly income. Total debt, including your mortgage payment, should not exceed 36 percent of your gross income.

Your credit rating

A credit score is based on many types of information in a credit file. Lenders use a credit score to help determine whether a person qualifies for a credit card, loan, or service. Generally, the higher the score, the less risk the person represents.

A good credit history can mean lower interest rates, a job offer or a decent apartment.

A bad credit history will stay on your record for years and will make obtaining a mortgage or car loan very difficult.

Be aware of what’s in your credit report. You can get your credit report free once a year from www.annualcreditreport.com.

Making student loan payments on time is often the first step in establishing a good credit history and will likely help you when applying for a car loan or home mortgage down the road.

Paying your rent, utility bills and credit card bills on time is important as they are also considered part of your credit history.

Your credit report includes your name, current and past addresses and employment, and all credit (debt) you have, including the current outstanding balance and whether you’ve ever been late for a payment. The report also lists any companies that have made credit inquiries.

Review all of the information on your credit report and challenge any information that you believe is inaccurate.

Last Modified: 1/24/17 11:31 AM