Students frequently ask me a variety of questions regarding the use of credit – everything from how to begin to establish credit responsibly, how to manage it, how credit scores are calculated, and so on. I’m always careful to explain that I can’t claim to be an expert, but as a financial social worker I counsel people on the importance of using credit wisely, and mistakes can be costly.
This is not a lecture on the evils of taking on credit card or other debt. Needless to say, we should never take on any debt unnecessarily. Cash is king, and using a debit card responsibly and managing our cash carefully can help minimize credit transactions and keep our debt at a manageable level.
So why do we need credit in the first place? Several reasons. First, for some major purchases, like a home or automobile, are simply too large for most people to handle from available cash. That is especially true for recent college graduates, and especially true for those already saddled with significant student loan debt. So yes, I will go ahead and say it, and sorry if you don’t want to hear the news. No, if you have significant student loan debt and even if you get a great job right after graduation, you don’t need a new car. You may need a car, but certainly not a new one, and definitely one you can’t afford.
And of course that also means you shouldn’t rush into buying a house, at least not until you have your existing debt on a workable plan for reduction and elimination. Managing debt responsibly means avoiding it when possible, assuming new debt only if/when necessary, and paying off debts as quickly as possible.
And of course having a credit card is important in the case of an emergency – when your car breaks down far from home, or when you have to see a doctor unexpectedly, or even just to rent a car on a trip.
A great start for understanding credit, how it works, how to manage it responsibility, and it impacts your credit score can be found at annualcreditreport.com. No, that is NOT freecreditreport.com! Annualcreditreport.com is the site that is owned and maintained by the 3 major credit reporting agencies. And yes, you can really get a free credit report there, at no cost and with no strings attached.
Do yourself a favor and visit the site, if for nothing more than some great educational resources. You’ll be glad you did.