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Personal Finance

The Basics of Credit Cards and Credit Card Debt

June 5, 2016
Updated December 4, 2019

Credit cards are an important component of building a strong credit history. Having a strong credit history will enable you to get future loans, such as a home mortgage and can lead to improved rates. Your credit history is also essential for other things, like getting an apartment or opening a cell phone plan. Credit cards — if used properly — can be effective in helping you to create a credit history in order to reach your financial goals, including becoming a homeowner.

 

According to Magnify Money, Americans paid banks $113 billion in credit card interest in 2018, up 12% from the $101 billion in interest paid in 2017. Because of this rising category of debt, it is important that you understand the basics of credit cards, how they are meant to be used, and a few tips on how you can get the most out of having them – without falling into debt.

 

What is a Credit Card?

A credit card looks just like a debit card, but instead of taking money out of your account when you make a purchase, it borrows money from your bank. Most credit institutions will give users a twenty-five to thirty day grace period with which to pay back the money they borrowed. If you do not pay the amount back within the allotted time, the bank will add interest to the remaining balance. The amount of interest added will be determined by your credit card’s interest rate and the amount of money that you owe for the remainder of the grace period.

 

Have a Repayment Plan

Users must be careful when making purchases with a credit card. It can be tempting to make a large purchase with a credit card and push the payment off until later. Forbes magazine says, “Credit cards are like DVRs for money,” because like a DVR, a credit card allows you pay now, and then pay it back later. This philosophy is what can lead to bad spending habits. So make sure that you have a plan before you make a purchase on your credit card. Look at your budget, and make sure that you allocate money for the use of paying off your credit card. Credit cards should be used as an extension of your financial accounts, NOT as a supplementary form of income. Making sure that you don’t spend more on your credit cards than you can pay back will ensure that you won’t find yourself in financial trouble.

 

Recommended Usage

Having a credit card is a great way to boost your credit and establish a good credit history. However, if misused, it can have a negative impact on your credit score. According to a recent survey from NerdWallet, most credit card users are unaware of the effects that many common actions have on their credit scores. In the financial industry, there are various opinions about how to best use a credit card. What experts can agree on, however, is that there are several important things you can do to ensure that you stay in good standing with your credit provider.

  1. The first things are to make sure that you never miss a payment. Whether you are paying a large lump sum or making a minimum payment — the minimum you can pay to stay in good standing — you must make sure to always pay on time. A missed payment could result in a reduced credit score.
  2. Another great practice is to keep your balance at or below 35 percent of your credit limit. This is the optimal amount for a healthy credit score, says Lucy Duni of Truecredit.com.

Owning and using a credit card does not have to be a bad thing, and it certainly does not mean that you are going to develop bad spending habits. If you follow these suggestions and make wise purchases, your credit history will be strong, and you will reap the rewards of being in good financial standing.

 

Check Out These Credit Card Myths

 

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Man feeling overwhelmed by student loans
2020-10-15
What to do When Your Student Loan Payment is Overwhelming   

Having student loans is not unusual. In fact, 45 million people have them. It’s also incredibly common to feel overwhelmed by your student loan payments.   A survey of student loan borrowers found that almost 65% of respondents said they lose sleep because of the stress caused by their loans. If you find yourself overwhelmed by your monthly student loan payment, there are some options you should consider to lessen the burden.   Before you can explore alternatives, however, you need to know the types of loans you have. Certain options are only available for federal loans as opposed to private loans. Check the Federal Student Aid website to determine any federal loans you may have, and request your free credit report to see any private loans. Once you’re familiar with your loans, you can consider new courses of action.  

Create a Budget

If you don’t already have a budget, create one! This will allow you to see if you can afford your current student loan payment. It will also show you areas where you’re spending unnecessarily. If you find there just isn’t enough income to cover all your necessary expenses, then you can begin working on different ways to reduce your student loan payment.  

Research Different Payment Plans

If your federal student loan payment is overwhelming, consider switching to a different payment plan. When you initially begin repayment, your loans are automatically put on the standard repayment plan. On this plan, your payments are based on a ten-year repayment term.   A Direct Consolidation Loan can help you change your payment plan to help make your payment more affordable. It can also help consolidate multiple federal loans into one loan. (Note: Consolidating your federal loans is different from student loan refinancing, discussed below.)   This will help you qualify for certain longer repayment plans, resulting in a lower monthly payment. One of the drawbacks of extending your payment term is you will end up paying more in interest costs over time.  

Income-Driven Student Loan Repayment

Certain loans are eligible for income-driven repayment plans. They can help make your payments more affordable and are based on your income and family size.  

Graduated Student Loan Repayment

If an income-driven repayment plan does not work for you, you can change to a graduated repayment plan. Your payment will begin low and increase over time for a ten-year term.  

Extended Student Loan Repayment

Another option is an extended repayment plan. To qualify, you must have certain loans over at least $30,000. Your payment may be fixed or may increase over time for a 25-year term.  

Look Into Refinancing

If you have overwhelming private or federal student loan payments, consider student loan refinancing. Refinancing may lower your interest rate and reduce your monthly payment. This is a good option even if your current payment fits your budget.   Refinancing can help lower your monthly payment, and can also save you thousands of dollars in interest over the life of the loan. Refinancing means obtaining a private loan to pay off your existing student loan or multiple loans.   Student loan refinancing differs from consolidation, which is only for federal student loans and may not necessarily reduce your interest rate. You can refinance private or federal loans, or both, and can also change your student loan repayment term to better fit your needs.   Here is an example of how refinancing can save you money:   If you have $65,000 of student loans with a 6% interest rate and have 10 years remaining on your loans, you will pay approximately $722 per month. If you refinance and qualify for a lower interest of 3.61%, your monthly payment would be reduced to approximately $646 per month. This equals savings $76 per month in savings. You will also save more than $9,000 in interest over the life of the loan.   To see how much you could save, try ELFI’s Student Loan Refinance Calculator.*  

Increase Your Income

Of course, increasing your income is easier said than done. If your student loans payments are becoming overwhelming, however, it may be a necessary step. Increasing your income through overtime hours or a side hustle can make your payments more manageable. A side hustle can be as easy as babysitting or dog walking, or more involved like starting a side business based on a passion.   If you haven’t begun repayment on your loans, but know you will face a significant loan payment after graduation, consider these steps:  

Build a Budget Early

Start a budget before repayment begins that includes your future student loan payment. This will allow you to see if you will be able to comfortably afford your payment. It will also help you build an emergency fund and a strong financial foundation.  

Seek Employer Student Loan Benefits

Look for an employer that offers student loan assistance. The number of companies that are offering student loan benefits is increasing, although the benefit is still rare. Some offer monthly benefits that can help you pay your loans off faster. Others offer a yearly benefit amount for a certain number of years. Either way, extra money from an employer to help pay loans will help you reduce your loan amount faster.  

Work Toward Public Service Loan Forgiveness

Apply for employment that may qualify for forgiveness. If you have federal loans, certain employment can qualify for forgiveness under the Public Service Loan Forgiveness program. Certain loans and types of employment are required so be sure to pay close attention to the requirements.  

Bottom Line

If you have an overwhelming student loan payment, explore your options to reduce your payment while furthering your debt-free journey.  
  *Subject to credit approval. Terms and conditions apply.   Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no­­­ control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.
Millennial woman learning how to invest
2020-10-09
How to Start Investing: A Millennial’s Guide

One of the best things you can do for your finances is start investing. Over time, investing is one of the likeliest ways you’ll build enough wealth to reach your financial goals — and even achieve financial independence.   While investing can seem like a daunting task, the good news is that it’s easier than ever to get started. Here’s what you need to know about how to start investing.  

Decide how much you can invest

Figure out how much you can invest each month. The key to long-term investing success is consistency. Even if it’s a small amount, you can start investing.  
Look at your income and expenses. Review which items can be reduced to create some room for investing. Even if you can only invest a few dollars per week, it will help you get started.  

Paying down debt vs. investing

One of the big issues facing millennials is whether to pay down debt or invest. In the end, it depends on your preference, but having debt doesn’t mean you can’t invest. For example, if you have student loans, you might put 70% of your available money toward paying down those student loans and the other 30% toward investing. However, if you have high-interest debt like credit cards, it might make sense to put 90% toward debt reduction and 10% toward investing.   Depending on your situation, you might want to tweak where you put the money, but you don’t have to let being in debt stop you from investing if you want to start building wealth.  

Know your goals

Next, decide on your goals. What do you want your money to accomplish on your behalf? What you plan to use your money for, as well as your timeline, can determine how you invest your money.
  • Short-term goals: If you want to save for a down payment on a house, a vacation or a similar goal in the next one to three years, consider putting your money in high-yield savings vehicles, or, depending on your situation and risk tolerance, bond investments. Even for short-term goals, in some instances, a mix of stocks and bonds can work.
  • Long-term goals: For longer-term goals like saving for a child’s college education or your retirement, you might decide to invest more heavily in stock funds, real estate investment trusts (REITs) and other higher-yielding assets.
 

Your risk tolerance

As you learn to start investing, make sure you understand risk tolerance. You need to be familiar with how much risk you’re prepared to take on. For example, if you’re relatively young, you have more time to withstand and recover from market downturns, economic problems and investing mistakes.   You should also consider your emotional risk tolerance. Even if, financially, you can handle the ups and downs of the market, you must be able to handle them emotionally, as well. If you struggle with the idea of using a stock index ETF to meet your short-term goals, then look for something that better suits your needs.  

Get help to learn how to start investing

There’s nothing wrong with asking for guidance as you learn a new skill. A number of online investment brokers can offer you professional help as you make your plans. Betterment, Wealthfront and Wealthsimple can help you build a portfolio that matches your risk tolerance and goals. Additionally, it’s possible to get help from human advisors as you create a portfolio.  

Basic tips to help you start investing

Start ASAP

It’s all about compounding returns, so the earlier you start, the better off you’ll be in the long run. Many investing experts talk about “time in the market instead of timing the market.” For many investors, starting early and being consistent about investing, while increasing contributions over time, is most likely to result in long-term success.   You can start investing at any time. If you haven’t started already, begin now. It’s relatively easy to open an account and begin investing.  

It’s fine to start small

You don’t need a lot of money to start investing. In fact, there are a number of apps that allow you to invest using pocket change. Check out our recommendations for the best investing apps here.   It’s true that investing a few dollars each week isn’t likely to fully fund your retirement or other financial goals. However, starting small gets you in the habit of investing and growing your wealth.   As your finances improve, you can increase how much you invest, growing your contributions to meet your goals. But, for now, start with whatever amount you can. The money you do invest in will grow over time, and you can keep adding to your portfolio in the future.  

Consider index mutual funds and ETFs

When trying to decide what to invest in, some people are overwhelmed by the prospect of sifting through individual stocks and trying to pick “winners.” For many beginners, it makes more sense to focus on vehicles that offer “instant diversity.”   Index investments offer exposure to hundreds — or even thousands — of securities at once. Rather than trying to choose individual stocks, you can get access to a wide swath of the market. If you decide later that you want to invest differently, you can change your portfolio makeup. For beginners, however, index investments offer a way to start building wealth while you research other choices.  

Learn the basics

Finally, make sure you learn the basics. Read about how investing works, how different assets perform and when they might be appropriate. While you can start small with index investments, use that time to learn when (or if) it’s time to try other investing strategies.   In the end, no one knows your situation as well as you do. Before investing, carefully consider your own situation and consider requesting help from an investing professional.  
  Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.
Celebrate paying off your student loans
2020-10-08
7 Ways to Celebrate Paying off Your Student Loans

At last, you’ve done it! You’ve been diligent in paying off your student loans, and now you’re finally free of them. Being free from student debt means you can start tackling other financial goals. Before you go back to the money-saving grind, however, why not celebrate paying off your student loans? After all, with student loan debt reaching 1.2 trillion in the United States, every time someone pays their debt off it’s worth celebrating.   While it may be a little more difficult to celebrate during the ongoing COVID-19 pandemic, you can still have a good time. Here are 7 great ways to celebrate paying off your student loans without acquiring new debt on the way:  

Relax

Simple as that, sit on the couch and enjoy being debt-free. Paying down student loan debt is stressful, but you’ve done it. Good job. Imagine we’ve given you a high-five and a pat on the back.  

Throw a Digital Party

Include all your friends or family in a video call and enjoy each other’s company. Maybe even schedule several separate video calls so you can focus on celebrating with each group.  

Treat Yourself

It’s time to treat yourself to something nice. Choose an item or experience that is meaningful to you: a new outfit, a new pair of shoes, go out to dinner, whatever makes you happy. Take some time to enjoy whatever you’ve gotten. You’ve certainly worked for it. Just make sure it’s not something that’ll put you into credit card debt!  

Treat Someone Else

What better way to celebrate your paying off your student loans than by including those who helped make you successful? Take your parents out to a nice dinner or have a good time with some close friends. Make sure they know how much you appreciated their support throughout your student loan repayment journey, especially if they’ve helped pay along the way.   Another great option is charitable giving. You can celebrate paying off your student loans by giving to a worthy cause. Whether as a one-time gift or a monthly series of donations, your money will go toward something that you feel is important. Not only will you feel great for having given to something worthwhile, but you may also be able to deduct your charitable donation from your taxes.  

Plan a Trip

Even if you’re planning for the future, now is the perfect time to consider where you’d like to travel. Take a look at some spectacular destinations. Decide where to go. Start saving now, and when the departure date arrives, you’ll be ready to go.   If you’re already saving toward other financial goals and want to be careful of your budget, consider a road trip. There’s still plenty of time for a cross-country odyssey before winter, and the countryside will look particularly beautiful in the fall. If you’re looking for more vacation ideas, here are a couple of vacation ideas that won't break the bank.  

Plan Your Next Financial Conquest

For those who are goal-oriented, now is the perfect time to decide what financial goal you’ll tackle next. Is it time to get a new car? Eliminate the rest of your credit card debt? Maybe it’s even time to buy a house. Ultimately it’s up to you to decide, but you should set up a plan to tackle that next big financial goal in a timely and efficient manner. The good news is, since you’ve already bested your student loan debt, you’re not only experienced but also prepared to face whatever comes next.  

Save Your Student Loan Payment

They say the best time to start saving was yesterday. The second-best time is today. Celebrate paying off your student loans by investing in your future financial health. Put the amount of your student loan payment in a savings account each month or consider investing it. Your future self will thank you. You’ve already proven you can live without it, so why stop now? But as always, make sure to do your research before you launch any type of investing strategy!   Congratulations on eliminating the last of your student loan debt. You should be incredibly proud of the effort you’ve put into seeing your payments through. Before you start the next step in your financial journey, take some time for yourself. Enjoy that feeling of success and use it to push yourself toward your next goal. Now is the time to celebrate!   If you haven’t yet paid off your student loans, you may want to consider student loan refinancing. Take a look at what student loan refinancing could do for you here.  
  Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.