By Sana Zahra
Isn’t it fun to purchase items on a credit card? Well, shopping on a credit card is a lot of fun, until you get the bill. As a college student, one must be aware of the consequences of debt. Credit is an arrangement to receive cash, goods, or services today, and pay for them in the future. But not being able to pay back even one payment can affect your credit score.
“Debt is a trap, especially student debt, which is enormous, far larger than credit card debt. It’s a trap for the rest of your life because the laws are designed so that you can’t get out of it,” said Noam Chomsky, an American linguist and political commentator, on how to avoid the economic pitfall.
We don’t realize that every time we purchase on credit, we discount our future income. This is because credit is like using tomorrow’s money today.
“Banks have this strange and irresponsible option you can fill out when getting your student debit card,” said Johan Rundquist, a senior Economics major. “It basically says that the bank will let you exceed your exsisting funds on your debit card. But what is not mention at all during this process is what happens after you’ve exceeded your limits.”
There are two types of debt: good debt and bad debt. Good debt can be loans for college education, or a mortgage to finance your home. It is an investment for the future. Whereas bad debt can be buying a brand new car, buying a $400 bag, or charging that expensive dinner at a fancy restaurant to your plastic. These are expenses you can’t usually afford.
Bad debt ties you into a situation where you must pay back the money you owe. For example, if you borrow $100 with an annual interest of 18 percent and decide to pay a minimum payment of $5 each month, it would take you 24 months to pay back just that $100, money that you might have spent getting a new haircut! Or, if you decided to pay a minimum of $10 each month, it would still take you 11 months to get your balance back to zero.
It might not seem that bad, but did you know that having credit affects your credit score? A credit score is a scoring method ranging from 300-900 that forms the basic foundation of your credit report. Lenders look at these to determine the likelihood that the loan will be repaid to that person. It also predicts how one will repay a loan and if they’ll make those payments on time.
Your credit report identifies personal information such as name, social security number, spouse, and employer. Credit history and public history are also mentioned in credit reports, and include detailed balance and payment information of credit accounts, bankruptcies, judgments, and tax liens. The information also includes a list of people who have received a copy of your credit report. This report is available for everyone, including creditors, landlords, employers, and the government.
Buying items on credit has become a trend, but not many people foresee the consequences. It’s like buying things for which you don’t have cash. As demonstrated in the example about borrowing $100, even a small loan can take a good amount of time to be paid back.
One should be able to differentiate between what debt is good and what is not. Stay away from spending when you cannot afford the expense, because it is costly to escape the debt trap.