Financial literacy is the ability to understand how money works in the world: how someone manages to earn or make it, how that person manages it, how he/she invests it (turn it into more) and how that person donates it to help others. More specifically, it refers to the set of skills and knowledge that allows an individual to make informed and effective decisions with all of their financial resources.
College is a time of new found freedom for many students. But that can spell trouble if that freedom applies to personal finances too. Students need to understand basic money management skills such as living within a budget and handling credit and debt. A solid financial foundation can lead to a lifetime of financial success
Here are some helpful guidelines to assist you understand the importance of taking charge of your finances.
Establishing a budget
Do you ever wonder where your money goes each month? Does it seem like you are never able to get ahead? If so, you may want to establish a budget to help you keep track of how you spend your money and help you reach your financial goals.
Examine your financial goals
Before you establish a budget, you should examine your financial goals. Start by making a list of your short-term goals (e.g., new car, vacation) and your long-term goals (e.g., your child's college education, retirement). Next, ask yourself: how important is it for me to achieve this goal? How much will I need to save? Armed with a clear picture of your goals, you can work toward establishing a budget that can help you reach them.
Identify your current monthly income & expenses
To develop a budget that is appropriate for your lifestyle, you will need to identify your current monthly income and expenses. You can jot the information down with a pen and paper, or you can use one of the many software programs available that are designed specifically for this purpose.
Start by adding up all of your income. In addition to your regular salary and wages, be sure to include other types of income, such as dividends, interest, and child support. Next, add up all of your expenses. To see where you have a choice in your spending, it helps to divide them into two categories: fixed expenses (e.g., housing, food, clothing, transportation) and discretionary expenses (e.g., entertainment, vacations, hobbies). You'll also want to make sure that you have identified any out-of-pattern expenses, such as holiday gifts, car maintenance, home repair, and so on. To make sure that you are not forgetting anything, it may help to look through canceled checks, credit card bills, and other receipts from the past year. Finally, as you list your expenses, it is important to remember your financial goals. Whenever possible, treat your goals as expenses and contribute toward them regularly.
Evaluate your budget
Once you have added up all of your income and expenses, compare the two totals. To get ahead, you should be spending less than you earn. If this is the case, you are on the right track, and you need to look at how well you use your extra income. If you find yourself spending more than you earn, you will need to make some adjustments. Look at your expenses closely and cut down on your discretionary spending. And remember, if you do find yourself coming up short, do not worry! All it will take is some determination and a little self-discipline, and you will eventually get it right.
Monitor your budget
You will need to monitor your budget periodically and make changes when necessary. But keep in mind that you do not have to keep track of every penny that you spend. In fact, the less record keeping you have to do, the easier it will be to stick to your budget. Above all, be flexible. Any budget that is too rigid is likely to fail. So be prepared for the unexpected (e.g., leaky roof, failed car transmission).
Tips to help you stay on track
- Involve the entire family: Agree on a budget up front and meet regularly to check your progress
- Stay disciplined: Try to make budgeting a part of your daily routine
- Start your new budget at a time when it will be easy to follow and stick with the plan (e.g., the beginning of the year, as opposed to right before the holidays)
- Find a budgeting system that fits your needs (e.g., budgeting software)
- Distinguish between expenses that are "wants" (e.g., designer shoes) and expenses that are "needs" (e.g., groceries)
- Build rewards into your budget (e.g., eat out every other week)
- Avoid using credit cards to pay for everyday expenses: It may seem like you're spending less, but your credit card debt will continue to increase
Understanding your credit report
Your credit report contains information about your past and present credit transactions. It is used primarily by potential lenders to evaluate your creditworthiness. So if you are about to apply for credit, especially for something significant like a mortgage, you will want to get and review a copy of your credit report.
You can see what they see: getting a copy of your credit report
Every consumer is entitled to a free credit report every 12 months from each of the three credit bureaus. To get your free annual report, you can contact each of the three credit bureaus individually, or you can contact one centralized source that has been created for this purpose. Besides the annual report, you are also entitled to a free report under the following circumstances:
- A company has taken adverse action against you, such as denying you credit, insurance, or employment (you must request a copy within 60 days of the adverse action)
- You are unemployed and plan to look for a job within the next 60 days
- You are on welfare
- Your report is inaccurate because of fraud, including identity theft
You can order your free annual report online at www.annualcreditreport.com, by calling 877-322-8228, or by completing an Annual Report Request Form and mailing it to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.
Alternatively, you can contact each of the three credit bureaus:
- Experian National Consumer Assistance Center, www.experian.com, P.O. Box 2104, Allen, TX 75013-2104, (888) 397-3742
- Trans Union LLC, Consumer Disclosure Center, www.transunion.com, 1000, Chester, PA 19022, (800) 916-8800
- Equifax, Inc., www.equifax.com, P.O. Box 740241, Atlanta, GA 30374, (800) 685-1111
If you make your request online, you should get access to your report immediately. If you request your report by phone or mail, you should receive it within 15 days.
What's it all about?
Your credit report usually starts off with your personal information: your name, address, Social Security Number, telephone number, employer, past address and past employer, and (if applicable) your spouse's name. Check this information for accuracy; if any of it is wrong, correct it with the credit bureau that issued the report.
The bulk of the information in your credit report is account information. For each creditor, you will find the lender's name, account number, and type of account; the opening date, high balance, present balance, loan terms, and your payment history; and the current status of the account. You will also see status indicators that provide information about your payment performance over the past 12 to 24 months. They will show whether the account is or has been past due, and if past due, they will show how far (e.g., 30 days, 60 days). They will also indicate charge-offs or repossessions. Because credit bureaus collect information from courthouse and registry records, you may find notations of bankruptcies, tax liens, judgments, or even criminal proceedings in your file.
At the end of your credit report, you will find notations on who has requested your information in the past 24 months. When you apply for credit, the lender requests your credit report--that will show up as an inquiry. Other inquiries indicate that your name has been included in a creditor's prescreen program. If so, you will probably get a credit card offer in the mail.
You may be surprised at how many accounts show up on your report. If you find inactive accounts (e.g., a retailer you no longer do business with), you should contact the credit card company, close the account, and ask for a letter confirming that the account was closed at the customer's request.
Basing the future on the past
What all this information means in terms of your creditworthiness depends on the lender's criteria. Generally speaking, a lender feels safer assuming that you can be trusted to make timely monthly payments against your debts in the future if you have always done so in the past. A history of late payments or bad debts will hurt you. Based on your track record, a new lender is likely to turn you down for credit or extend it to you at a higher interest rate if your credit report indicates that you are a poor risk.
Too many inquiries on your credit report in a short time can also make lenders suspicious. Loan officers may assume that you're being turned down repeatedly for credit or that you are up to something--going on a shopping spree, financing a bad habit, or borrowing to pay off other debts. Either way, the lenders may not want to take a chance on you.
Your credit report may also indicate that you have good credit, but not enough of it. For instance, if you are applying for a car loan, the lender may be reviewing your credit report to determine if you are capable of handling monthly payments over a period of years. The lender sees that you have always paid your charge cards on time, but your total balances due and monthly payments have been small. Because the lender cannot predict from this information whether you will be able to handle a regular car payment, your loan is approved only on the condition that you supply an acceptable cosigner.
Correcting errors on your credit report
Under federal and some state laws, you have a right to dispute incorrect or misleading information on your credit report. Typically, you will receive with your report either a form to complete or a telephone number to call about the information that you wish to dispute. Once the credit bureau receives your request, it generally has 30 days to complete a reinvestigation by checking any item you dispute with the party that submitted it. One of four things should then happen:
- The credit bureau reinvestigates, the party submitting the information agrees it is incorrect, and the information is corrected
- The credit bureau reinvestigates, the party submitting the information maintains it is correct, and your credit report goes unchanged
- The credit bureau does not reinvestigate, and so the disputed information must be removed from your report
- The credit bureau reinvestigates, but the party submitting the information does not respond, and so the disputed information must be removed from your report
You should be provided with a report on the reinvestigation within five days of its conclusion. If the reinvestigation resulted in a change to your credit report, you should also get an updated copy.
You have the right to add to your credit report a statement of 100 words or less that explains your side of the story with respect to any disputed but unchanged information. A summary of your statement will go out with every copy of your credit report in the future, and you can have the statement sent to anyone who has gotten your credit report in the past six months. Unfortunately, though, this may not help you much--creditors often ignore or dismiss these statements.