If you are entering into college soon, you have likely heard about student loans and credit cards. Some students heavily rely on them to pay their way through college, but the biggest problem with this is accruing unmanageable debt.
The biggest problem with credit cards and student loans is education. Students do not truly understand what they are getting themselves into. For instance, student loans are available to every student who applies for them. Since they are easy to obtain, many students rely on their convenience without considering debt obligations down the road. When it comes to credit cards, students may even be less knowledgeable; in fact, college students have the lowest credit scores in the nation. This mindset is a big contributor to the student loan and consumer credit debt, two leading forms of debt in the United States.
These are obvious problems, but there are plenty of ways to avoid debt while still in college. There is still time to make financial changes that lead to a better post-graduate debt situation. Here are tips on keeping out of debt as well as managing debt while in college.
Avoiding Student Loan Debt
If you want to avoid student loan debt altogether, then you cannot take a backseat approach. While it can be done, you need to be proactive and smart with your decisions.
One of the first ways to avoid student loan debt is to explore free money options. You should look into federal grants and scholarships. These do not have to be paid back, and they can be directly applied to the cost of your tuition and college-related expenses. Scholarships and grants require research and hard work. You will need to search for opportunities online and send in applications consistently throughout college in order to get any results.
Another way to avoid debt in college is to work a part-time job while sticking to a budget. Some students borrow more loans to cover living expenses, but this is not a good idea. The best strategy to cover these expenses is to work throughout college. When you factor in a strict personal budget, the task is much more manageable. All of this circumvents extraneous student loans.
While your heart may be set on a university, sometimes it helps to attend a community college first. You can take your general courses at a much lower cost. Afterwards, you can transfer credits to another school in order to start working for a better degree. This option can save upwards of $10,000, but the actual amount varies depending on region and school.
Lastly, this may not be your first choice, but you can wait to attend college until you are financially stable. There is pressure on all high school graduates to go to college, but sometimes the finances are too difficult. If you do not have a set career plan, then taking out student loans is a huge potential problem down the road. Your best bet is to wait until you have better finances and plans.
Avoiding Debt from Credit Cards
Avoiding credit card debt is a bit tricky. The true way to keep from building credit debt is to refrain from using a credit card. This is extremely effective, but it has its implications. For instance, you will be unable to build up a solid credit score which is extremely important for home buying. The trick is to keep your credit card spending under control without completely abstaining.
First off, the maximum credit utilization ratio is around 30%, and credit utilization is the percentage of your credit limit that is currently being used. If you can consistently pay off a credit card bill that is 30% of your credit limit each month, then you can build good credit. Any higher than that is viewed as credit malpractice to some extent, so you should stay below 30%.
Building credit aside, it was mentioned that these payments need to be made consistently on a monthly basis. This is an extremely important point, especially if you want to avoid interest payments. To put this simply, you will not have to worry about any sort of interest payment if you pay your credit balance in full every month. No minimum payments are to be made, just the full balance. While this is mainly to avoid extra debt, it does improve credit score as well.
In addition to paying off monthly balances in full, you should steer clear of certain transactions with credit cards. Interest is charged on cash advances and balance transfers, but it is only applicable if you carry out one of these transactions. By avoiding them entirely, then there is no need to worry about debt.
Student loans and credit cards are sort of like a double edged sword. They are effective and useful, but they can hurt you if used improperly. With student loans, the best solution is to avoid them entirely because there are plenty of other opportunities with equal financial value. Credit cards are different because you should not actually avoid credit card debt; you need to manage it effectively by avoiding extraneous debt and building good credit. There are plenty of ways to get yourself into a hole of debt, but there are just as many ways to get out of debt, too!