Are you just starting out in life a few years after college? If so, you may already have one or more credit cards.
The credit card companies are just great at getting young people to sign up for their credit cards. But getting credit is just the beginning. There are important things you need to know about credit and debt settlement and here are seven of them.
Doesn’t it just feel great to be able to pull out a credit card and buy something?
It can feel like free money. After all, the only thing you needed to take out of your wallet was a little piece of plastic.
The danger inherent in credit cards is that they make it too easy to spend money.
But that money must be paid back – and usually with interest.
The best piece of advice you can give yourself if you’re an impulse spender is to take those cards out of your wallet and freeze them in a container of ice.
That way, you’ll never fall victim to impulse spending.
Missing just one credit card payment can stain your credit report for years. Plus, it will have a decidedly negative effect on your credit score.
Years from now, a potential lender or landlord could check your credit report, and see that you missed a payment (or worse, yet more than one), and decide not to lend to you or to rent to you.
There is an easy way to avoid late payments, and that’s to set up automatic payments to your credit cards.
If you haven’t seen your credit report, you need to get it. It’s free on the site www.annualcreditreport.com, or on the sites of the three credit reporting bureaus.
The reason you need to do this is because it could contain errors that are damaging your credit. Look closely at all the types of credit in your report and the status of each credit card or loan. It’s the only way you can know if your credit is being reported correctly.
It can be tempting to sign up for multiple cards – to get those juicy points or travel rewards. But if you sign up for multiple ones within a short time, it will damage your credit score. It’s better to be very selective, and apply for just the one card where you think you’ll qualify, and that offers the best rewards. The website Mint.com has a great tool for finding the credit card that would be best for you.
Compound interest can be your best friend or worst enemy. It’s your friend when you invest in something that offers compound interest. This could be a bond, a CD, or an annuity.
On the flipside, credit cards are your enemy because of compound interest or charging interest on interest. Here’s an example of what this can mean. Let’s suppose you owe $1000 on a credit card at 17% interest, and you make just the minimum payment of $24.17 every month.
Believe or not, it would take you 111 months to get rid of that debt, and would cost you $857.52 in interest … or more than 80% of what you initially borrowed.
We can’t know what financial emergency will hit you, but we know one will. It’s just as inevitable as night following day. The only way to prepare for one of these emergencies is to have an emergency fund. It’s best to have the equivalent of three months’ of your living expenses in your fund. However, that might be a bit much at this point. So, try to put at least $1000 in your emergency fund. Then, add to it as you can.
If you lost control of your spending and find yourself swimming in debt, it’s important to understand an option called debt settlement.
The simplest explanation of this is that you offer to settle your debts by making lump sum payments to your lenders but for less than you owe. For example, if you do have $1000 on a credit card, you could contact the credit card issuer and offer to settle the debt for $500.
The problem with this is that if you’re seriously in debt, you’d probably be hard-pressed to come up with enough money to settle your debts. Most people choose to use a debt settlement company for this reason.
This offers two benefits. First, using a debt settlement company eliminates the need to have the cash available for lump sum settlements. Second, debt settlement companies have years of experience dealing with lenders, and are almost always able to negotiate better settlements than people can themselves.
Knowing what you now know about credit and debt settlement should help you keep you out of trouble. As you have learned credit can be a good friend if you use it wisely. But if you use it badly, it can have a negative effect on your financial life for years to come.