A recent study from Credit Sesame focused on financial literacy, especially among marginalized people. The results are highly suggestive: 65% of marginalized non-whites said they had never received any financial education, while only 41% of white Americans could say the same. This financial literacy gap isn’t just a minor issue, it’s a major barrier to financial independence.
So, what can we do with this information? First of all, understanding some basic financial principles can have a huge impact on our lives and budgets. Here, Credit Sesame financial analyst shares five essential financial tips everyone should know:
1. Avoid credit card debt
According to experts, credit card debt is the most dangerous type of debt you can get into. That’s mainly because credit cards are so readily available at all times, making it very easy for debt to accumulate.
High interest rates on credit cards (average APR of 24.74% as of August 2024) exacerbate the problem. Compare that to interest rates of 12.8% on a personal loan, 6.73% on a car loan, and 6.59% on a mortgage, and you’re entering dangerous waters.
Plus, because there’s no set repayment period, credit card debt can accrue interest forever, widening your financial hole.
2. Take care of your credit score
Having a low credit score can close many doors for you and affect more than just your credit score. As studies show, more than 20% of people with bad credit are unable to rent an apartment, which is almost twice as likely as people with good credit.
Additionally, employers and insurance companies also use credit scores to assess liability and risk, meaning a low credit score could make it harder to find a job and make your insurance premiums more expensive. Given these far-reaching effects, it’s important to maintain and regularly monitor your credit score.
3. Check your credit score regularly
Maintaining good credit isn’t a one-time task. It’s something you need to do regularly. Think of it like brushing your teeth: something you do regularly to avoid bigger problems in the future. Good credit is essential not only when borrowing money, but in many other aspects of your daily life.
For example, if you’re looking to rent an apartment, landlords will often check your credit score to see if you’re trustworthy. The same goes for job hunting. Some employers consider your credit score as part of the hiring process, seeing it as a sign of responsibility and stability.
Plus, a high credit score can help you get lower interest rates on loans and credit cards, saving you a lot of money in the long run. Regularly checking your credit score and practicing good financial habits can help you maintain good credit so you’ll always be in a good position when opportunities arise.
4. Pay more than the minimum credit card payment
As Barrington points out, a strategic approach to managing credit card debt is to always pay more than the minimum required payment. Credit card companies benefit when consumers extend their repayment period because they pay higher interest rates. By paying off more than the minimum amount, you can significantly shorten the repayment period and save money on interest.
5. Match your loans to your purchases
When you take out a loan, it’s wise to consider the useful life of the things you’re buying. Long-term loans should be reserved for purchases that will last at least as long as the loan term, such as a home or a car. These investments retain their value over the long term, so a longer repayment period is also justified.
On the other hand, it’s not a good idea to spread out a short-term expense, like a one-week vacation, over several years. This kind of mismatch can lead to ongoing financial stress, as you continue to pay for something long after it has depreciated. It can also limit your future financial flexibility, making it difficult to save and invest in more meaningful, permanent purchases.
Essentially, your debt repayment plan should align with the lifespan of the items you’re buying to avoid unnecessary financial stress.
What can you do to improve financial literacy?
This study highlights how important it is to learn about money and budgeting early on. People who receive financial education in school tend to have higher incomes and better credit scores. It’s like giving your kids a financial head start. But here’s the catch: Only about half of U.S. states actually require financial education in high school.
But don’t worry. Parents can still do something. Teaching kids how to manage their money helps set them up for future success and stability.
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