Plenty of people who have the latest fashions and tech toys, or drive the newest cars, do so under a tremendous debt burden. Staying out of debt is immensely more satisfying in the long run.
San Mateo, Calif. (Vocus) August 19, 2009
This school year, the passage of Credit Card Accountability, Responsibility and Disclosure Act will change the face of college debt -- and Bills.com offers a "syllabus" of six ways for students to gain money smarts along with a diploma.
Many college students build up tremendous amounts of debt. Between 2001 and 2007, student loan balances rose 18 percent to an average of $22,700 per borrower. In 2008, 84 percent of college undergraduates had at least one credit card, and students are carrying record-high balances -- an average $3,173 in 2008. More than one in five students (21 percent) had credit card balances between $3,000 and $7,000.
But this year marks a turning point in college-student debt: With the passage this year of the Credit Card Accountability, Responsibility and Disclosure Act, this is the last semester that credit card lenders will be able to solicit students in person and on campus to open credit cards. It is also the last semester in which credit card companies will be permitted to issue cards to applicants under age 21 without an adult co-signer or proof of adequate income.
For those heading to campus, Ethan Ewing, president of free online consumer portal Bills.com, offers this roster of college disciplines to help students obtain straight As in personal finance:
1. Philosophy: Live within your means. Borrowing for college can be considered an investment in the future, but do not go further into debt to fund a lifestyle, Ewing said. "Plenty of people who have the latest fashions and tech toys, or drive the newest cars, do so under a tremendous debt burden. Staying out of debt is immensely more satisfying in the long run."
2. Microeconomics: Create and use a budget. No matter how much or how little income students have – and whether they earn it or receive it from their parents – get in the habit of budgeting, Ewing advised. Even pencil and paper work to create a budget. (Bills.com has developed a 16-page guide titled "Debt Freedom: Budgeting & Financial Tools for Today's Consumer,” available electronically, at no charge.) Simple steps:
a. Understand income. Total all incoming funds, even set amounts received from parents or savings from a summer job. Categorize ongoing monthly expenses into fixed expenses (like rent), variable expenses that are "must-buys" (food, gas, medicine, books, supplies), savings and spending money. The total is your cost of living.
b. Subtract expenses from income. If that number (bottom-line cash flow) is negative, take a hard look at the budget and find a way to either increase income or reduce expenses, difficult as that may be.
c. Map it. At the first of the month, map out a plan for spending in the coming month. That is a budget.
3. Logic: Save part of all income. Get into the habit of saving for the future. Try to deposit 10 percent of any paycheck directly into a savings or money market account. The goal should be to accumulate enough funds to cover expenses for three to six months in case of an emergency. This emergency fund also can help avoid putting unexpected costs on a credit card.
4. Planning: Pay bills on time. Open every bill as soon as it arrives, then pay immediately or create a simple system to pay every bill on time, whether with a folder on your desk or an online calendar. Students who are responsible for routine bills such as phone, utilities or rent can sign up for online bill payment, where automatic scheduling eliminates forgotten bills. Just make sure funds are available in the account on the bill due date.
5. Business management: Pay credit cards in full. To manage personal business, most adults need one credit card. College students may fall into this category if they can learn to use a card appropriately. The cardinal rule: Pay off the full balance every month to avoid finance charges, build a good credit score, and stay out of debt. Paying less than full payment each month begins a cycle of fees that is difficult to end. In addition, paying less than the full amount means that the original purchase will end up costly significantly more than its purchase price.
6. Higher mathematics: Build and manage a credit score. A good credit score can significantly impact an individual's ability to borrow money as well as the interest rate he or she will pay. Credit scores also can affect the ability to rent an apartment, lease a car, or even get a job. The first step is monitoring credit reports. All consumers – including college students – can access credit reports once each year for free at http://www.annualcreditreport.com. If the report shows any inaccuracies, correct them right away. Then make sure to pay every bill on time, all the time.
Remember that establishing good credit means being able to use credit responsibly. It is acceptable to use one credit card, paying off all charges in full each month, as credit agencies rely on past payment history to gauge how borrowers will do in the future. For those without a credit card, a student loan or a car loan paid off monthly help build a credit history.
"Heading off to college is a time of excitement in a young adult's life. It also is a crucial time to learn how to manage finances responsibly," Ewing said. "While student loan debt is considered 'healthy' debt, because it helps work to build a future, students also need to learn how to manage that debt and their day-to-day finances. By setting good habits now, students will lay a solid foundation for life ahead."
Based in San Mateo, Calif., Bills.com is a free one-stop portal where consumers can educate themselves about complex personal finance issues and comparison shop for products and services including credit cards, debt consolidation, insurance, mortgages and other loans. Bills.com holds the No. 257 spot on the Inc. 500 list for 2008, and the No. 3 spot on Entrepreneur Magazine's Hot 100 list of the fastest-growing U.S. companies.
Bills.com and its sister companies, Freedom Debt Relief and Freedom Tax Relief, are wholly owned subsidiaries of Freedom Financial Network, LLC. The company has served more than 50,000 customers nationwide since 2002 while managing more than $1 billion in consumer debt. Its RSS feed is available here.
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