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Guidelines for Budgeting/Credit

The largest problem for young people regarding credit today is not that they cannot get credit, it is that credit is all too available at a time in life when all things are in a state of flux. During the next seven years, most people coming out of high school will have major changes in life: jobs changes while you find out “what you want to be”, moving out of parents’ homes, moving again when you realize best friends are not always the best roommates, going on to further training or education, marriage, parenthood. All of these changes will affect your ability to manage money.

Credit is the ability to manage money/debt over time. Many things affect the ability to do this. The one thing they all have in common is stability: stable income, stable residence, stable payment habits, and good record keeping. Every credit transaction will remain on an individual’s credit report for 7 years, whether it is positive or negative. While it’s exciting to get that first credit card approval, always remember that how the account is managed will still be reflected on a credit report seven years later when the mortgage application goes in.

Here are some guidelines to keep handy:

  1. Housing costs should never exceed 28% of your gross monthly income.
  2. All other monthly debt payments combined (credit cards, card payment, personal loans, etc.) should not exceed 20% of your monthly gross income.
  3. Never pay just the minimum payment due. If you have a $2000 balance on a credit card at 19% interest and pay the minimum due, it will take 23 years to pay the account off even if you never charge another dollar. 
  4. The amount outstanding on all unsecured credit accounts (credit cards, department cards, etc.) should not total more than one month’s gross income.
  5. Try to get six months (minimum) of living expenses in a savings account before taking on any debt.
  6. Make down payments as large as possible. This requires you to take time to save the money, which gives you time to research your purchases. It will cut into impulse buying.
  7. Finance balances for the shortest time you can afford.
  8. Always read all contracts very carefully. Check for cancellation/closing penalties.
  9. Close any accounts you do not use. It is not good for your credit history to have lots of open accounts, it just makes you a high risk in the creditors eyes.

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