Credit cards. A number of different images may flash through your head when you hear those two little words. Do you picture yourself freezing your card in a block of ice? Putting it through a shredder? Lighting it on fire?
Or do you see yourself casually strolling out of a store, shopping bags in hand, feeling elated about all the fabulous things you just bought and didn’t have to pay for…(yet)?
Either way, credit cards are a polarizing topic that seems to divide people faster than Donald Trump’s tweets. Some people equate credit cards with financial disaster and endless debt. Others view them as a way to build credit and save money through cash back and perks. Personally, I fall somewhere in the middle of the spectrum. Here’s a few of my own pros and cons of credit cards that will (hopefully) help you decide if owning a credit card is a good financial decision for you.
Let’s start with the bad news first.
Con #1: CREDIT CARDS CHARGE INTEREST – LOTS OF IT!
You’re probably thinking, “DUH.” But, let’s just say it like it is. The #1 reason why credit cards have a bad reputation is the high interest charged on unpaid balances. Even though most people know credit cards can charge high interest, many overlook the details. For example, exactly how much interest is your credit card charging? When does interest begin to accrue? On what amount does the interest apply? Does your credit card offer a grace period? All of these details can be found in the fine print, usually in confusing legalese than can make you feel like a chimpanzee trying to do calculus. In summary, the best way to avoid interest altogether is pay your full credit card balance on time every month. If you don’t, you’ll be that chimpanzee trying to do calculus to figure out how in the world your $200 new TV (it was such a great deal!) ended up costing you $500 (OUCH).
(Also, side note, there is a myth floating around out there that you need to carry a balance on your credit card and pay interest in order to earn good credit. This is absolutely false. Carrying a balance may hurt you, not help you. That’s all. Carry on).
Con #2: Credit Cards Can Be The Gateway Into A Deep Dark Debt Hole
Credit cards can be the gateway drug into a seriously dangerous debt problem. Why? Because they are so easy to obtain and so easy to use. Here’s a personal example for you. When I started my first job out of college as a social worker, I was making about $32,000 per year. I signed up for my first credit card and was given a credit limit of $4,000. Wow – $4,000! That’s a lot of cash! My credit card company must think I’m really responsible…
HOLD UP. Let’s do some math: Say my hypothetical take-home pay (after tax) was $28,000 annually. $28,000 / 12 months = $2,333 net monthly income. With a credit card limit of $4,000, I could choose to max out the credit card in the first month, buying a $4,000 all-inclusive vacation to Hawaii. Aloha to me!
The problem is, in order to pay the balance off, I would have to use my entire $2,333 paycheck over the next few months to pay off the full credit card balance. This is nearly impossible, because I would have no extra cash left over to pay for rent, food, transportation, clothes, or anything else for that matter. As a result, that remaining unpaid balance gets carried over from month to month – and is charged interest in the meantime. And that, ladies and gentlemen, is why credit cards can be a gateway drug. Easy to obtain. Easy to use. Easy to spiral out of control.
Thankfully, I didn’t fall into this debt trap. I never used more than 25% of my credit limit and made sure I could pay the balance in full at the end of every month. Ironically, because I was using my credit responsibly, I received about five credit card offers in the mail every week and was offered a credit limit increase. All of this is great until too much of a good thing becomes a bad thing. It can be easy to become addicted to borrowing money – even if you are responsible with paying it back. Having $10,000 in debt and a great credit score is still not as good as having no debt at all.
Con #3: Credit Cards Aren’t Necessary
That’s right. You don’t need ‘em. In today’s culture, having a credit card is equivalent to having a cell phone. If you don’t have one, you’re living in the dark ages. But in reality, you really don’t need a credit card – especially if you’re able to build up credit through other sources, like student loan payments. Side note: credit cards + social media = disaster waiting to happen. Why? When we constantly see posts of people taking luxurious vacations, buying a new home, getting their dream car, or wearing designer clothes, we often (even subconsciously) feel like we’re missing out. In order to “keep up with the Jones’,” we swipe our credit cards to pay for a lifestyle we can’t afford. Guess what. A lot of people who appear to have it all on social media may actually be drowning in debt to keep up with the image they want to portray. Don’t fall into that trap. (Okay, I’ll get off my soapbox now. Thank you for coming to my TedTalk).
And now for the good news:
Pro #1: Credit Cards Help Build a Good Credit Score
This is true – IF (and that’s a big IF) you diligently pay your full balance each pay period. And, as stated in Con #3, you really don’t need a credit card to build up your credit score. Other methods of building credit include paying off student loans, getting a secured loan or secured credit card (backed by your own pre-deposited money), or becoming an authorized user on someone else’s credit card (ideally someone with good credit history). In fact, I would argue that building credit through one of these methods is a much safer option than diving head first into an unsecured credit card.
As a disclaimer, here is my personal story. I graduated college without any student loans, and I will remain eternally grateful to my parents for their sacrifice to make that happen. As a result, I vowed to never put myself into unnecessary debt, since my family worked so hard to keep me out of it. But, this also meant I had no credit to my name. I started with one universal credit card with no annual fee and some small perks. I only used this card for a few designated expenses, like rent and gas, so my spending wouldn’t get out of hand. Over the next couple years, I paid this card on time each month and also added a couple store cards as well. I was able to build a solid credit score in a relatively short period by consistently paying the full balance, using different lines of credit, and keeping my credit limit usage under 25% at all times. BUT, this is my personal story. It is not the universal solution to building credit. Find a method that works best for your personal financial situation.
Pro #2: Credit Cards Provide Points and Perks
If I’m being honest, this Pro could also be a Con. Here’s why: while most credit cards offer some incentive for use (like cash back or airline miles), the benefits may not outweigh the expenses. For example, if you have an airline credit card with a $100 annual fee, but you only take 2 flights per year to earn $50 in airline miles, then you really lost money by using the card (especially if you were charged interest on unpaid balances from month to month). Make sure if you’re purchasing a card with an annual fee, you calculate whether or not the annual fee will produce enough benefits to justify the cost.
NerdWallet has an excellent credit card comparison tool to help narrow down which credit card will be the best fit for your lifestyle. (#NotSponsored). In fact, I used this tool to find my first two credit cards, based on my spending habits, credit score, and desired benefits. One of the cards I decided upon is the Amazon Prime Visa card (Again, #NotSponsored. But, Amazon, if you wanna slide in my DMs…)
I already buy the majority of my essentials on Amazon, everything from dish soap, to cat food, to breakfast bars. By using the Amazon Prime credit card to make these purchases, I also earn 5% cash back on these transactions and 1% back on everything else. What makes this really valuable is, nearly every time I go to order some of these essentials Amazon, I have anywhere from $5-$25 cash back to use toward my purchase. Again, this is what works best for me, but it may not be the best fit for you. Try out the NerdWallet calculator to find your best credit card fit.
Pro #3: Credit Cards Teach Financial Discipline
Just because you could eat a whole box of donuts in one sitting doesn’t necessarily mean you should.
Similarly, just because you could spend your full credit limit in one month doesn’t mean you should. Using credit cards effectively requires discipline and discernment. Many people get themselves in deep debt trouble when they begin to disassociate their actual cash money from the motion of swiping their credit card. In other words, it’s easy to forget about the pain of paying for purchases when you have the ability to enjoy something instantly without paying a single penny upfront. Credit cards themselves are not the enemy. It’s the emotional and psychological response of purchase without pain that gets us in trouble. The good news is, we have the ability to acknowledge the mental pitfalls of credit card usage and shift our mindset to avoid them. Here’s a rule I personally follow to keep my finances in perspective: I never make a credit card purchase if I don’t have enough money in my checking account to cover it immediately. Credit cards make it easy to spend money we don’t have, but they don’t need to lead to financial ruin. A shift in mindset and a healthy dose of discipline is all you need to make sure your credit cards are working for you, not against you.
**P.S. If you read this and thought, “Well, shitake mushrooms. I’m already up to my eyeballs in credit card debt. Now what?” No fear! We will be tackling debt reduction planning in our future content very soon!
Written By: Kaitlyn Duchien
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On this special Father’s Day episode, we chat with Darrell and Allison Perry, a father-daughter duo! We hear from Darrell, the father of Allison on how he raised his two kids, advice he has given them in regards to finances and how that influenced Allison so far in her life. You won’t want to miss what they have to say!
And if you like us, don’t forget to subscribe and leave a review! XOXO
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Have you ever spent an obscene amount of time researching and crafting the perfect budget, only to give up on it a week later like a poorly executed diet plan? Do you find yourself trying to stick to your budget but your inner Donna Meagle just won’t let you?
If the answer is yes, you’re not alone! Only about a third of Americans actually make and maintain a budget (Yikes!). Being a college student newly introduced to the world of ‘adulting,’ I have tried countless methods in an attempt to set myself financially free. Here are some tips and tricks that have made my life easier (and hopefully yours, too).
- Find an app or budgeting system that works for you.
Mint and EveryDollar are great apps that allow you to budget and track your expenses. BUT, in case you want more options, Buzzfeed has already found, rated, and summarized 17 other apps to help you stay accountable. Other ways you can budget include Excel Spreadsheets, good old fashion pen and paper on templates like this template, journals, whiteboards, and more. You’ll want to make your budget before the month starts and adapt the budget to each month. Whether you’re picking up a side hustle in summer time or celebrating birthdays, you’ll need to account for everything! At the end of each month, see where you overspent and try to improve your budget for the next month ahead.
- Get a calendar, find a place to hang it where you’ll see it, and fill in the boxes.
Add your bills, the due dates, pricier events like birthdays, etc. to help you organize your expenses. It takes some time, but it’s totally worth it! If you have a fluctuating income, you could even add your day-to-day earnings on the calendar. This will help you visualize your month ahead and show you how much you need to have in your account by the next bill. Not to mention the satisfaction you’ll have when you get to cross out that bill for the month! If you want a more private alternative to this, create events with this information in your phone’s calendar and set reminders for yourself.
- If you can, try to pay cash!
I’m not suggesting you carry your entire life savings on you but try to keep only what you budgeted to spend for the day. This will force you to stay on target, and you won’t have to deal with credit card interests if you use cash! People tend to spend more money when they use a debit or credit card compared to when they use cash. With cash, you can look directly at what you have left and adjust your spending habits accordingly.
Another reason why paying with cash can be helpful is all the loose change you’ll accumulate! You can keep these coins to yourself and cash them in at a later time for cash, or gift cards if you want to avoid fees. If you choose the cash option, you can turn that coin fund into an extra savings fund for your personal goals. You’ll be surprised how quickly coins add up.
- Find a way to organize your cash.
Some people like Dave Ramsey’s method of using envelops, but that’s not the only way. Another easy way to organize cash is by purchasing a hanging shoe organizer and put labels on each pocket with different budget categories such as groceries, gas, rent, clothing, etc. You could hang this in your closet, your office, or anywhere you feel would be safe. This cash should be for short-term purchases, not for your emergency fund or savings goals. For that money, I recommend a safe savings account. You can find a good savings account here.
- Lastly, don’t be afraid to say no.
In the beginning, budgeting will be difficult because you’ll have to tell yourself no more often—especially compared to your friends that don’t budget. Does this mean you have stay home all day and watch re-runs of the Office instead of hanging out with your friends?
Of course not! There are plenty of free-to-low-cost ways to have fun. If you’re running low on your recreational fund, try some of these. Not only will this help you stay on track, but it will challenge you to do something different. Also, saying no lets you say yes later. Instead of spending money on late night trips to Taco Bell, you can put that money towards a short-term savings goal like a road trip!
These tips have made me perfect my budgeting habits, and they may help you conquer the budget! If you need more ideas, Pinterest and Google will be your best friends. Just remember that the hardest part about budgeting is keeping yourself accountable and accepting that you’ll make mistakes. You will fail. You will adapt. You will overcome. Be patient and find a system that works for you. Your current self and future self will thank you!
Article Contributed By: Kianna Dalton
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Have you ever had a terrible day that just seemed to keep getting worse? You didn’t hear your alarm go off, so you woke up 20 minutes late. When you jumped out of bed in a panic, you stubbed your toe on the nightstand (who put that there?!). At least you still had time to make yourself a fresh, steaming-hot cup of coffee! Unfortunately, on your way to work, an idiot cut you off in traffic and that steaming-hot cup of coffee flew out of your hand and on to your favorite white shirt.
Nice. Huffing and puffing, you barely make it into the office when a coworker stops you and says, “Are you ready for your presentation in the meeting this morning?” (Oh, sh*t. I thought that meeting was tomorrow!) Later on, you realized that you packed a can of cat food instead of chicken salad for your lunch (ew), gave your crush a fist bump in return to a high-five (awkward), dropped a stack of important documents everywhere, and ripped your pants when you bent down to pick them up (tragic). It’s 4:58pm. You’ve almost made it through the day (thank goodness), but you decide to send one last email before you head home. You need to send your coworker, Danielle, a spreadsheet she requested, and decide to mention how annoying your boss has been lately. Sent! Then your heart stops. That email didn’t go to Danielle. It went to Daniel…your boss.
We’ve all had one of those days. But, what makes a day like this so bad? It’s not because just one little thing went wrong. Oh no. It’s because one bad experience seemed to lead to another, which led to another and another, compounding into a terrible day overall.
While this example of a bad day demonstrates how compounding can work against you, compounding interest is a financial tool that can actually work for you in a very positive way, even on a crappy day. Holla!
First of all, what is compound interest? Compound interest is a basic financial concept where interest is not only calculated on your initial investment (simple interest), but is calculated on your initial investment PLUS any interest you have earned previously. Your money is earning money on its money.
Let’s break it down:
Say you put $1,000 into an account that is earning 5% simple interest for 10 years. At the end of the 10 years, you would have a total of $1,500. ($1,000 x .05 = $50 x 10 Years = $500). However, let’s also say that you put $1,000 into an account that is earning 5% compound interest for 10 years. In this case, at the end of 10 years, you would have a total of $1,628.89. How did you end up with more money using compounding interest vs. simple interest? Let’s break it down even further:
For the DIY-ers out there, here’s the formula used to calculate compound interest:
P [(1 + i)n – 1]
P= Principal (Original Investment)
i = Annual Interest
n = Number of Compounding Periods
So, to plug in the numbers from above:
$1,000 [(1 + .05)10 – 1] = $628.89
And here’s a comparison between simple and compound interest over time:
If you’re like me, you probably just glazed over that last section like a Krispy Kreme donut. (I donut blame you). So, we see how the numbers work. Why does it matter?
Compound interest could be the single most important factor either making or breaking your bank account over time. You could either be using compounding interest to your advantage by putting funds into a retirement or investment account and allowing it to compound (grow) more quickly over time. Or, compounding interest could be your worst nightmare if you’ve got high interest credit card or student loan debt, which would compound just as quickly, but in the wrong direction. (Yikes!)
As we can see in the chart above, compounding interest produces a greater return (grows faster) than simple interest over the same period of time. And the key word here is TIME. The concept of compounding interest is pretty spectacular on its own. However, without the crucial ingredient of time (no, not thyme, sorry G’ma), your compound interest will produce very bland results. The longer you wait to withdrawal any of your funds, the more powerful – and flavorful – the compounding effect will be. (Can you tell I’m hungry? Did someone say pizza??)
If you put $1,000 in a retirement account that grows through compounding interest, congratulations! You’re #winning at this game of life. But, if you become impatient and decide to take out $10 here or $20 there, you’ll quickly undermine all the positive benefits of compounding, while likely getting slapped with some hefty tax penalties as well (if you’re under 59 ½). Ouch – Game Over.
If you’re someone who struggles with delayed gratification (aka ME), here’s a life hack to make you think twice about taking money out of your compounding accounts. It’s called the Rule of 72, and it’s a fast calculation to show how quickly your money can double inside a compounding account (without taking withdrawals – no touchy).
Simply divide 72 by the annual interest percentage to see how many years it will take for your money to double. For example, if you’re earning an average of 8% annually in an investment account, your money will double in 9 years (72 / 8 = 9). You put in $1,000 today and you’ll have $2,000 in 9 years. Cha-ching! Obviously, the more money you can invest early on, and the longer you can let it grow, the better your outcome will be.
This is exactly why the best time to start saving is today. Like, NOW. (Actually, the best time to start saving was yesterday…but there’s no time like the present!)
If you want to see for yourself how compound interest works, check out this, this, and this. You’re welcome.
Written By: Kaitlyn Duchien
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The choice to go to college is a big commitment. It’s a commitment to yourself and it’s a commitment to the payment that accompanies this hope for a successful life. Some people are lucky enough to have the financial burden of a college education taken off their shoulders by parents, family members, sponsors, etc. And some people are extremely diligent, work incredibly hard, save up, and pay for college themselves.
I, however, am neither of those people. I am with the group that I would assume is the majority: the unfortunate souls who had to take out student loans to attend college. Through my own personal experience, I have learned a few lessons on how to avoid some of the student loan burden before you jump into college, as well as how to alleviate some of that burden once you’ve crossed the stage with diploma in hand.
My first tip comes from something that I did not do enough: Be involved in the process of applying for student loans. Do your research. Knowing what you are getting yourself into is half the battle in being prepared when your loans finally come due. My mother was nice enough to walk through the loan application process with me. Although I was fortunate to have her assistance at the time, I still did not fully understand what I was getting myself into or how much time it would take to repay the loans after graduation.
Let me give you a snapshot of what my college expenses entailed. I attended a lovely private university in my home state of New Jersey. Fortunately, I was a good student in high school and received $12,000 per year in scholarships. I also commuted an hour to the university each day to save money. But even with scholarships and without the cost of on-campus housing, the tuition still added up to approximately $30,000 a year. And that’s not even counting the cost of textbooks, which amounted to $500-$1,000 each semester! So how was this all paid for? We took out student loans; sometimes per year, sometimes per semester.
All the loans that I took out were fixed rate as opposed to variable. I didn’t know much, but knew I wanted to have a set payment. (Fixed rate means you have the same interest rate for the life of the loan and variable means the interest rate can move around). I consider myself to be mostly conservative, especially when it comes to my debt; so, for me, fixed rates were the better choice. With a variable rate, you are subjecting yourself to the possibility of rates changing, potentially increasing or decreasing throughout the life of your loan. One option is not better than the other; it simply depends on your financial outlook and how you want your future payments to be structured.
Fast forward four years and I am a college graduate! Thankfully, right after graduation, you are not expected to pay your loans immediately. So, go out and live it up! Because in a few months, it’s about to get real!
No, please don’t do that. Plan for your payments and prepare yourself for the abuse you are about to take.
After I graduated and my student loans came due, it was the biggest slap of adulthood I had ever received. I had about eight separate loans, all at varying interest rates, coming to a grand total of around $100,000. My monthly payment totaled out to approximately $950. Combine this payment size with the fact that the first job offer I received out of college was $28,000 per year as a junior business analyst. $28,000. You can imagine how I felt: COOMPLETELY DOOMED!
I took a step back to figure out what steps I could take to reduce the financial burden and the feelings of doom. First, having eight separate payments is a nightmare. Secondly, all the varying interest rates made some payments seem like a good deal while others seemed to be a rip-off. Finally, the biggest issue was obvious: paying $950 a month while making $28,000 a year was not going to work.
The solution I discovered was to consolidate and refinance my loans with a longer payment period. Consolidation, simply put, allowed me to take all my separate smaller loans and combine them into one larger loan. Refinancing student loans is just like refinancing a mortgage. In ideal circumstances, a new loan at a better rate will replace your existing loan, although this might not always be the case.
A plethora of private companies and banks promote assistance with student loans, such as College Ave, Earnest, and SoFi. Many of these organizations allow you to fill out a free online application to determine if you “pre-qualify” for their services. When I began searching the internet for a solution, SoFi and Earnest offered the best interest rates to consolidate and refinance my loans. Here’s the catch: unless you are either making close to $100,000 a year (aka making BANK) or have an extremely solid cosigner (someone who loves you very much and is willing to put their name on your loan so the lender feels more comfortable), the qualifications to be accepted by these companies are quite high. However, through diligent searching and applying, I was able to consolidate and refinance my loans through Citizens Bank. While the process of finding the right company to assist with your specific situation may take time and effort, it is fairly easy and well worth the effort.
Once I was approved by Citizens Bank, the final step was to choose the term of my new loan. Ultimately, that’s what the consolidation and refinancing process is all about: taking out a new loan to pay off your inconvenient, higher-rated current loans. Here’s the basic principle when selecting the term of a loan: the shorter the term of the loan, the less you will pay in total interest, but the higher the monthly payments will be. The longer the term, the more you will pay in interest, but your monthly payment will be lower over an extended time period. In my case, I chose the longest term possible. As much as I want to pay off my loans quickly, I also need to keep my everyday living expenses in mind. Also, the loan that I chose allows me to pay early without penalty. So, if I can contribute more than my required payment, I will be able to pay the loan down more quickly. Even if this is a rare occurrence, it’s a nice feature to have. Not all loans allow this, so it is worth asking if this feature is available when refinancing your own.
Ultimately, the consolidation process brought my number of payments down from eight to one. The refinancing process reduced my interest rates to a more realistic average, and the longer maturity allowed me to pay a lower monthly payment. Although I did extend the amount of time I will be making payments, the cost of the payment is much more manageable for my current situation, and it addressed the problems I needed to fix. I know I am not the first or the last college grad to feel the wrath of student loans. But, being able to share my experiences, ideas, and relate to others is an important step in finding solutions.
Article Contributed By: Christian Boyle
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Like most folks who hear the term ‘budget’, I cringe, close my eyes and begin groaning inwardly like Tina Belcher from Bob’s Burgers (No? Just me? Oh geez…).
In the past, I would search for budget templates online, attempt to follow them, realize they didn’t fit my tastes or my lifestyle and I would walk away defeated. I would wonder what was so wrong with my finances that I couldn’t match exactly what some of these articles were telling me.
But that’s the uniquely wonderful (and yes, incredibly frustrating) thing about budgets: they aren’t black & white or one-size-fits-all; they can be tailor-made to fit your specific lifestyle, needs, and wants. I say ‘incredibly frustrating’ because it does take time and a fair amount of effort to find a budget that works for you—your wants and needs are going to change and with that, so will your budget.
At the end of each paycheck, for me, there’s a sense of strength that comes from knowing where each of my dollars are going and knowing what I’m left with to play with however I choose. Full disclosure: that’s my favorite part about budgeting because I love seeing what money I have left over and let’s admit it, we all want to have fun with our money—after all, we work hard for it!
I’ve been creating a budget for the past 6 years or so and I have found a few things to be invaluable in my attempt to understand and control where each of my hard-earned dollars are going:
1. Know your debt intimately. When I started creating a budget, I couldn’t tell you which of my debts had the highest interest rate or what their balances/minimum payments were; it honestly gave me a headache every time I tried to write it all out. Knowing this info gives me the opportunity to see where I am and where I can send extra cash. Small amounts add up over time & it feels so good to see $0 next to a debt I owe.
2. Figure out some financial goals. These can be as little or broad as you would like them to be but I normally create small goals to feel encouraged in continuing to hit some of my larger goals. I ask myself where I’d like to be in 3 months, 6 months, and a year! And, as a side note: I treat myself when I accomplish a financial goal—it keeps me inspired and reminds me that even though ‘adulting’ and ‘budgeting’ aren’t exactly the most thrilling parts of life, they are necessary and we can make it as easy or hard as we want it to be.
3. Be flexible. Always be open to changing whatever you feel isn’t quite working for you and your budget. Your goals are going to adjust over time and with that, your budget will too and that’s okay! I’ve tried several different budgeting techniques (the 80/20, the 50/15/5, etc) so be willing to try out different techniques until you find one that works for you. Your wants/needs change regularly, so why wouldn’t your budget?
One last, small tip I’ll give to those preparing to create or change their budget is this : give yourself lots of grace. You’ll fall short, not reach certain goals, or get that call on a Friday night from your BFF who’s had a rough week and she wants to go out to eat and grab a few drinks—in those moments, it’s challenging. All you can do is adjust, pick yourself back up, and attempt to stick to it better next time.
There are also tons (and I mean literal tons) of information and resources out on the world-wide web that can get you started on creating a budget or finding example budgets to follow and use as a rough outline for your own.
Article Contributed By: Bethany Trosper
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