by Bill Hardekopf
Almost two million people recently graduated college and the fortunate ones are
now entering a new chapter of life called the working world. For the class of
2013, the average graduate is already weighed down with $32,500 in debt when
they leave college, according to a study of college graduates by
Many college graduates are now more cautious about adding new
debt. Young adults are carrying less debt than before the start of the 2008
recession, primarily because they own fewer major assets, according to recent
analysis from the Pew Research Center. The percentage of younger households with
debt of any kind dropped to 78%, the lowest level since the government began
collecting this data thirty years ago. The share of young adults with credit
card debt declined to 39% in 2010 from 48% in 2007.
While overall debt
declined, debt from student loans was the only major type of debt to increase.
Student debt accounted for 15% of the total debt for young adults in 2010, up
from 9% in 2007.
This reluctance to add debt is a good start. Here are
some additional financial tips for new graduates:
- Save and invest now. If you are single or married without kids, you have fewer financial obligations than you will have after you start a family. This is a good time to spend wisely and save for the future. Maximize your retirement accounts because even though the stock market is volatile, time and compounding growth are on your side.
- Pay down your debt. If you went to college, you may be starting out with significant student loan debt. 40% of the people under 30 have outstanding student loans, and the average outstanding student loan debt is approximately $25,000. On top of that, you may also have credit card debt. Start by paying off the debt with the highest interest rate and pay as much as you can above the minimum payment. If you get extra money as a gift, bonus or tax refund, use this as an extra payment on your debt. Clip coupons and take your lunch to work, and use the money you save to immediately make micropayments on your debt.
- Build up your credit score. Test scores are behind you, and now is the time to focus on your credit score. This score is more important than any exam because it represents how lenders judge you. Your credit score affects the terms and interest rates for all loans--credit card, mortgage and auto. The higher your credit score, the lower your interest rates, resulting in more money you can keep. Your payment history and how you handle money is so important that it may be used for apartment rental or insurance applications.
- Make a budget and put every dollar in place. Start with your net income--your income once taxes, healthcare and retirement are taken out. Don't underestimate expenses. Track your spending for a month or two to get an accurate understanding of your expenses and where your money goes.
- Start saving immediately from every paycheck, even if it is only a small amount. Open a retirement account at work or your own IRA. Time and compounding interest will help your small amount grow into significant savings by retirement.
- Open a separate savings account to save for an emergency fund. The goal should be three months of income. If you lose your job or have sudden, unexpected expenses, your emergency fund--not your credit card--should be your safety net. Using loans to pay for an emergency simply adds to the cost of the emergency.
- Pay every one of your bills on time. Late payments are often responsible for a significant drop in your credit score.
- Pay off your credit card debt as soon as possible. If you are carrying a balance from one month to the next, do not put any new purchases on your credit card. If you can't pay for it with cash, you can't afford it, so don't buy it.
- Monitor your credit history with free annual credits reports through annualcreditreport.com. You can get a free credit report from each of the three credit agencies (Equifax, TransUnion and Experian) every year.
- Know everything about your student loan. Find out when the payments begin, who owns the loan, and the loan's interest rate. If you have a little extra cash, you can even prepay your college loans.
- Set a payment schedule. If you are not trained in paying bills, it is easy to misplace a bill or pay it late. Late fees compound the problem and paying late can lead to lower credit scores. The easiest way for young people to pay bills is to do so online with scheduled email reminders of payments.
- Know the warning signs that you are heading for financial trouble. Warning signs could include: credit cards being charged up to the credit limit; your debt growing each month; bouncing checks; and getting calls from creditors. If you have any of these signs, take action now. Get an understanding of how your money is being spent. This is a good time to talk with your parents or a credit counselor about living within your income.
Bill Hardekopf is CEO of LowCards.com, a site that simplifies the confusion of shopping for credit cards. It is a free, independent website that
helps consumers easily compare credit cards in a variety of categories such as
lowest rates, rewards, rebates, balance transfers and lowest introductory rates.
It also gives an unbiased ranking and review for each card.