Financial Responsibility Lecture

Today, I presented a financial responsibility lecture for my Critical Thinking students. These students are freshman, and I figured this would be the perfect group to discuss this very important topic.

The truth is, no one wants to talk about money. Almost 70% of college students say that their parents have not had the "talk" with them. The lack of information has resulted in the following.:

Can You Believe This?*

That is why I have become so passionate about teaching students and others the importance of understand what credit is and what can happen when it is abused. Overall, I think the lecture went very well. The students had very thoughtful questions and were genuinely surpised with some of the information I presented.

*Information courtesy of the C.A.R.E. Credit Abuse Resistance Education Program of which I am a new member!

Credit management

Credit is a nasty 6-letter word that I think is often misunderstood. By definition, credit is an arrangement for deferred payment for goods and services. Often times, we lump these ideas in with credit cards, but the truth of the matter is that any form of debt invites credit.

One of my favorite forms of credit is store promotions that offer 0% interest for some time, typically 3 to 12 months, for larger purchases. These are also called "same as cash" promotions. A general recommendation is to set this money aside in a savings account. Divide the amount owed by the number of months out and budget accordingly. If you are planning a large purchase, this sort of budgeting can also be done prior to the purchase to make it more reasonable.

Credit cards can also be useful when awaiting reimbursement. However, it is still good to pay what you can because interest rates on credit cards tend to vary from the initial (low) rate to an adjusted (and extremely high) rate. A general rule to determining how much money a month is going to interest is to divide the APR by 12. It is a very rough estimate, but it can clue you into the cost of merely having your balance. Some cards can carry a 28-40% interest rate, so if you must carry a balance, try to move it to your lowest rate cards.

When determining how to utilize your spare income at the end of the month, stack your payments according to interest rates. If you have an investment earning a return higher than your debt, then invest there. If not, then pay down your principal on your debt. Certain debt is "good" debt (education, mortage) so pay down your other credit debt first.

After some discussion with a friend about credit ratings and scores, here are some pointers:

• If you use credit cards that carry a balance, about $200 balance per month helps your credit rating. If you always pay down your balance every month, you're actually not improving your score. Conversely, if your cards are near their limits, then your score will likewise be lowered.
• Every time someone pulls your credit report, your score could be affected. It takes about 11 credit checks per 12 month period. Therefore, if you are shopping around for a bank or home lender, it is wise to carry a copy of your credit report with you.
• Know your interest rates and what you can do to change them. For example, most credit cards will let you keep your low introductory rate if you are always on time with your payments.

Credit management is more than paying down your credit cards at the end of the month.