Whether you’re watching out for pitfalls or on the lookout for good deals, the more you know about credit, the better.
WARNING: PAY IT OFF
Thanks to credit card rules that went into effect in 2010, your monthly statement must tell you how long it will take to pay off your balance if you pay only the minimum due each month and how much you’ll pay in finance charges. It can be a real eye-opener. You’ll also find out how much you’d have to pay each month to pay off the total in three years and what that would cost.
If you make more than the minimum payment due, the credit card company must apply the extra to the balances with the highest interest rates first. That works in your favor because it should help you reduce your debt more quickly.
TO WHOSE CREDIT?
If you’re married or have a partner, you can apply for credit as an individual or make a joint application. The advantage of applying jointly is that both incomes and job histories count, which may help you to qualify more easily. The drawback is that both of you are responsible for paying the bills no matter which of you spent the money. This can be a problem if you have different spending habits, or if your relationship comes to a bad end. Most financial advisers urge you to keep at least one card in your own name or apply for credit as an individual, even if your other finances are handled jointly. And they suggest using the card regularly and paying the bills on time. This way, if you suddenly need access to credit in your own name, you’ll have it.
What won’t help you build a credit history is being listed as an authorized user on someone else’s individual account. Even if the card you’re using has your name on it, your use of credit won’t be recorded in your name. It will go on the record of the main cardholder.
If you’re not charging more than you can pay off, there’s no reason not to put as many expenses as you want on your credit card. It saves you the trouble of having to carry cash and simplifies your monthly bill-paying. And, if you have an affinity card, using it regularly is a good way to accumulate points for air travel or qualify for free shipping or discount coupons.
SECURED vs. UNSECURED
Most loans you’ll qualify for are secured loans. That means you are required to put up assets as collateral on the money you borrow. If you can’t repay your debt, the lender can repossess, or take back, your collateral and sell it to recover what you owe.
For example, a car loan is a secured loan—if you don’t make your payments, the lender has the right to repossess your car. The same goes for a mortgage, with your house as collateral.
Unsecured loans don’t require collateral, just your promise to repay— and the lender’s belief that you’re creditworthy. For example, your student loans are unsecured. But if your parents took a home equity loan to help pay your tuition, it’s secured by the family home.
Because unsecured loans carry a greater risk, commercial lenders may be reluctant to make them if you need the money for anything but educational expenses. The lenders who regularly make unsecured loans tend to charge high interest rates.
You’ll probably have an easier time arranging an unsecured loan informally, from a friend or family member.
THE BASICS ON BASIS POINTS
If you’re looking for a loan (or dealing with repaying one), you’ll probably hear lenders mention basis points. They’re referring to the unit that’s used to measure differences in interest rates.
A basis point is 1/100 of a percentage point. So if you’re paying 7.25% interest on an adjustable rate loan, and the rate goes up 25 basis points, your new rate is 7.5%.
SWEETENING THE DEAL
The government offers several incentives for doing the right thing with your student loans. For example, if you sign up for electronic debiting for your monthly payments, you’ll get 0.25% deducted from your interest rate—in addition to the time and energy you’ll save by not having to send a payment by regular mail each month. And you may get an interest reduction for having a good record of on-time payments. Check information about the Direct Loan program regularly at https://studentaid.ed.gov/sa or with your lender for information about these offers, and be sure to take advantage of them whenever you can.
Another thing that makes student loans a good kind of debt is that you’re often eligible to deduct the loan interest you pay on your federal tax return. You’re likely to qualify for the deduction as long as your modified adjusted gross income (MAGI) is $80,000 or less—or $160,000 if you’re married and file a joint return— and the loan wasn’t from a relative or employer. Your loan provider will send you IRS Form 1098-E, “Student Loan Interest Statement,” to report how much interest you’ve paid.
Check out IRS Publication 970, “Tax Benefits for Higher Education,” for more information.