Credit is an important part of an adult's financial health. It can be used to purchase a home or other investment, to fund a college education, to start up a new business and more. However, the use of credit can quickly spiral into a huge debt issue. According to the AARP, approximately one-quarter of all bankruptcy filings are by those under the age of 34. In addition to the number of young adults who have filed for bankruptcy, there are millions of other young adults who struggle financially under the burden of high credit card balances, a large home mortgage payment and car loan payment, student loan payments and more.
The Conundrum of Credit and Debt for Young Adults
It is common for young adults to take on their first “real” job and enjoy a rather sizable income in comparison to their earning power from typical “teenage” jobs. The income of a young adult can double, triple or more almost overnight when this happens. A steady stream of a higher level of income from a new job creates the perceived ability to take on additional monthly payments through a higher car loan payment, a home mortgage and more. Further, many young adults are aware of the importance of credit. Some may open credit card accounts and other types of loans or credit accounts with the main intention of establishing credit. Many, however, take on more debt than they can easily pay off, and the problem of debt can quickly spiral out of control.
Understanding the Hidden Expenses of a Purchase
Many young adults fail to take into account the hidden expenses associated with a purchase. For example, some may purchase a new home with a home loan. The mortgage payment may be similar to the monthly payment they were paying in rent, so the new home purchase seems like a wise move. However, there are many hidden expenses associated with home ownership. For example, home maintenance needs, home repairs, property taxes, homeowners insurance, the need to furnish the home, an increase in utility bills and more. The home purchase may have seemed affordable, but it may have created more of a financial burden than a young adult was prepared for. There are hidden expenses associated with many purchases including the purchase a new car, a new boat and even a new pet. Before buying anything, whether larger or smaller in size and cost, consider what the usage and upkeep costs associated with the item are. In many cases, an item involves more expenses than simply the monthly payment associated with its purchase.
Managing Credit and DebtYoung adults do want to use their higher level of income to make purchases and improve their lifestyle. They also want to establish a great credit history by making wise use of credit. There are several steps that you can take to manage credit and debt wisely. Consider developing a great budgeting strategy. Regularly review and update your budget, monitor your spending activity and keep tabs on your debt balances. Focus on paying off debts that you already have rather than on acquiring new debts. When possible, pay cash for most items to avoid falling heavily into debt. For example, you may use a car loan to buy a new car, but you can simply save up cash for a few months to buy a new, large screen TV. Before making a purchase with credit, ensure that you understand the effects of that monthly debt payment and all related expenses on your budget.
When you are young and carefree and are earning a great income, it can be easy to make purchases without much thought. Provided you have a way to pay for those items, you may make purchases without consideration for your budget and how the debt of a purchase could linger in your budget for months and years. However, debt can soon spiral out of control. In order to avoid amassing debt and eroding your credit rating, consider employing these strategies when using credit for purchases.