There are many advantages and disadvantages to using credit. Understanding the difference is important in developing good financial sense. Credit is a convenient and helpful financial tool that allows you to avoid the problems of handling cash and can be beneficial during emergencies.
However, credit comes with pitfalls such as high interest rates and annual fees. If you don’t plan accordingly or are not realistic about what you borrow, you may create a snowball effect that is hard to stop.
Tools to manage and understand credit:
Here is a great article on college students using credit cards.
College is a great time to develop positive habits to help you stay out of debt. Since many students do not work full-time or have all expenses covered, many find it difficult to keep their borrowing under control.
All debts, both good and bad, have some form of risk. When you have good debt, your financial risk is low and your chances of making money are high, such as with student loans or a car loan. Student loans are considered good debt since you are investing in yourself and have a greater potential for a higher paying job. However, these debts are only considered good if you are able to pay the monthly payments and are not falling behind on other bills.
Conversely, bad debt occurs when you borrow for items that immediately decrease in value. Some examples of bad debts are using a credit card for eating out, clothing, or entertainment. When you incur bad debt, you take on risk in exchange for something that loses value within moments of purchase.
We encourage you to read the Credit section of the College in Colorado website, as it gives specific detail on the main areas of credit and debt. Before you borrow money you should always have a plan and a budget. Make sure you understand if the financial decision will impact your future.
Once you have acquired credit card debt it is crucial that you check your credit report regularly. Also, make sure you check your credit card statements monthly to check for signs of possible fraud. In addition to detecting fraud, it is important that you check your credit report regularly so that you become an informed consumer of credit services.