Did you know 70% of nurses graduate with debt? It’s very common, so if you’re struggling with debt, know that you’re not alone.
Not all debt is equal, and there are steps you can take to get out of debt faster and improve your credit as you go.
What Is Debt?
Debt is when you owe money to a lender or creditor. That might be a company, an institution, the government, or even a friend or family member. There’s typically a cost associated with debt. This cost is financial, obviously, but the time it takes to pay off debt and the emotions we experience in that process are also costs associated with debt.
Debt can be helpful in allowing us to do things that have a big upfront cost, like buying a car or home. For nurses, debt can make it possible to pay for school. But taking on debt can be a slippery slope, especially when lenders offer low introductory rates that give way to fees down the line. The goal with managing debt is to find a balanced approach where we can leverage debt to open doors without getting carried away.
Three Things to Know About Debt
#1 Not all debt is equal
There are two types of loans, secured and unsecured. Secured loans include things like home loans, auto loans, or any loans that can be secured with collateral. Collateral are items the lender can claim if you fail to make good on your loan. Because these loans are less risky in the eyes of the lender, they’re generally cheaper to open.
Unsecured loans are more prevalent in the marketplace. They include personal loans, credit cards, and payday loans. These types of loans are based solely on your credit history. Because these loans are considered riskier in the eyes of creditors, they’re more expensive. However, they are typically easier to access.
#2 Your credit score and report influence the rates you’ll get
Your credit score is more or less a summary statistic about how well you have handled your credit in the past, or how “thick” your credit report history is. As you progress through your working life and pay back credit, your credit score rises. Your score is not the same as your report, but reflects the information inside the report. The most common score used is called a FICO score. It’s based on these factors:
Payment History (35%) – Are you paying back at least your minimum balance every month? If defaulting, or not paying becomes a consistent pattern, your credit score will fall.
Credit Utilization (30%) – How much of your credit are you using? Lenders want to see this on the low side. So if you can borrow $30,000 but you’ve only borrowed $2,000, this will raise your score. Spending up to your limit each month will lower your score.
Credit History (15%) – How have you handled credit in the past? Past records of defaults can raise your rates.
New Credit (10%) – Are you opening a new line? You get rewarded for opening a new line of credit with a small bump in your credit score. However, the bump is minimal and you should avoid opening new lines of credit just for this purpose.
Credit Mix (10%) – Can you handle multiple types of credit? Managing a variety of lines of credit, like a student loan and a credit card, can raise your score.
#3 Know where lenders make money, and that will save you money
Paying attention to where lenders make money can help you avoid fees, and find the best rate for you. Interest rates are the most standard way lenders make money. It’s a good idea to shop around for the best rates, but be careful. Some lenders offer low rates only to have hidden fees elsewhere. Look out for balloon rates, where your rate can increase based on certain conditions like making a late payment.
Annual fees are another common way lenders make money. Rewards cards, for example, often carry high annual fees that can outweigh the actual rewards. Creditors also make money by charging an interest on your balance. Most experts suggest paying your entire balance whenever possible, rather than carrying over credit card debt.
Now that you understand more about debt, you can start making a plan to pay off your debt and build better credit. Still have questions? Watch the full webinar for more details, and a Q&A with Catherine New.
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