Still confused about finances? Lauren’s back with more tips. Photo by Lauren Hough.
LAUREN HOUGH | OPINION COLUMNIST | firstname.lastname@example.org
Foreword: I am the least qualified person to be giving you this advice — I am a sophomore economics major with nothing more than an Excel spreadsheet and binder full of credit card and bank statements to manage my finances. However, my basic understanding of budgeting and credit has set me up for financial success in the future. It goes to show that this information is incredibly easy to find, learn and implement in your own life and it is definitely worth the trouble.
This week, we are tackling three of the scariest concepts in the world of personal finances — credit, insurance and investment. But don’t fret: understanding credit score, insurance types and the difference between stocks and bonds isn’t as hard as your high school home-ec teacher made it sound. If you haven’t yet, take a look at the student loan and budgeting edition from last week. It will help prepare you for what’s coming.
So sit back, relax, and let’s tackle this together.
What is credit, really? A magic number, a mystical power, a wizard who deems you worthy of dangerous adventures? Honestly, it kind of is! Credit is your ability to borrow money without immediate payment because lenders know they can trust you to pay back your debts. Your “borrowing capacity” is numerically represented by something called a credit score.
Credit scores, which range from 300 to 850, tell lenders how reliably you have paid back previous loans. Credit score is the primary reason it is important to open a credit card as soon as possible — to start building credit now. Over time, you will develop something called credit history, which shows just how reliable you are. Your credibility as a borrower can be determined by how high your credit score is, and the longer your reliable credit history and on-time payment of bills, the better your score will be. Abby Wild, junior finance and accounting double major, stressed the importance of opening a credit card.
“It teaches you responsibility because you have to pay a bill at the end of the month,” Wild said. “Building up credit is super important because in the future, if you want to take out a loan, all of the banks will look at your credit.”
It can seem scary to track and maintain your credit score, but it’s very manageable if you know how. You can get a free annual credit score check through credit bureaus like Experian, or your credit card company may offer it as well.
To prevent your score from falling, there are a few easy steps you can take. First and foremost, pay your bills on time. Professor of finance William Templeton told me one of his top credit hints for students.
“Never carry a balance on a credit card. Never,” Templeton said. “All in all, you should avoid having large amounts of debt in any capacity because it will harm your score.”
Next, don’t close your credit cards. I repeat: Don’t. Close. Your. Credit. Cards. Closing long-used cards lowers your credit age and in turn, your credit score. Not to mention, it lessens the amount of credit available to you, which is also taken into account when calculating your score.
You may be asking, Lauren, I get what credit is, but why is it important? Here’s why: a good credit score can lower interest rates and increase your likelihood of being approved for a loan. Over time, these two perks will save you a lot of money and a ton of stress.
Now that you’ve — hopefully — created a budget after last week’s article, it’s time to understand what the “insurance” portion of that budget means. Before you go signing up for insurance plans willy-nilly, you should take some time to determine what types of insurance you need and what plans your employer offers.
There are three types of insurance you should definitely make sure are covered: auto insurance, homeowner’s/renter’s insurance and health insurance. Auto and homeowner’s insurance are not typically provided through employers, but health insurance is, so be sure to check what your company’s health insurance policy is.
Other types of insurance that may be offered are disability insurance and life insurance. Chances are, you might not need either of these right now. Unless you choose a line of work that has an inherent possibility of physical danger, disability insurance isn’t necessary….