Where Does Your Money Go?

Key Takeaways

  • Before buying something on credit, ask yourself whether you really need the goods or services, can afford them, and are willing to pay interest on the purchase.
  • Whenever you use credit, those you borrow from provide information on your debt and payment habits to three national credit bureaus.
  • The credit bureaus use the information to compile a numerical credit score, called a FICO score, which they share with subscribers.
  • The credit bureaus consider five criteria in compiling the score: payment history, total amount owed, length of your credit history, amount of new credit you have, and types of credit you use.
  • As a young person, you should do the following to build a good credit history that will give you a high FICO score.

    • Become an authorized user on your parents' account.
    • Obtain your own credit card
    • Get the right card for you.
    • Use the credit card for occasional, small purchases
    • Avoid big-ticket buys, except in case of emergency.
    • Pay off your balance each month.
    • Pay all your other bills on time.
    • Don't cosign for your friends.
    • Do not apply for several credit cards at one time.
    • Use student loans for education expenses only, and pay on time.

  • To raise your credit score, you should pay your bills on time, pay more than the minimum balance due, keep your card balances low, and pay your debts off as quickly as possible. Also, scan your credit report for any errors and get any errors fixed.
  • If you can't pay your debt, explain your situation to your lenders and see a credit assistance counselor.
  • Before you incur a debt, you should understand its costs. The interest rate charged by the lender makes a big difference in the overall cost of the loan.
  • The costs associated with credit cards include finance charges, annual fees, over-limit fees, late payment fees, and cash advance fees.
  • The Federal Reserve changed the debit card rules in 2010 and now banks must get your permission before they enroll you in an overdraft protection program.
  • If you have a problem with splurging, cut up your credit cards and start living on a cash-only basis.
  • If your monthly bills are too high for your income, do whatever you can to bring down those bills.
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