Debt is an amount due or owed to a person or entity. Most students have debt in the form of credit card payments and student loans. Although you may understandably get into debt in order to pay for your education, debt can pile up and become a big burden. We want you to stay well informed on student debt; this includes the different types that exist, how the interest on loans work, and how to avoid debt altogether. Debt isn't something we want to have on our minds, but it is important to at least know some basic facts about it.
What is Debt?
How to avoid debt?
Credit cards should only be used if you can pay off the balance immediately. Remember that there is a period of disconnect between swiping your card and the money leave your account. Control borrowing by getting yourself on a budget, and use any leftover income to pay down debt beyond your minimum payment (what the credit company or student loan provider requires you to pay). It is important to pay more than the minimum payment to avoid incurring interest; the more you pay now, the less you pay overall.
When you borrow money (such as through student loans or credit cards), you have to cover the principal and interest. Principal is the amount you initially borrow. For example, if you spend $1,000 on your credit cards, then that $1,000 is your principal amount. However, when you receive your statement, you will notice that interest is assessed. If the interest you have is 'simple' interest, interest is calculated off the principal. So, take that same $1,000 dollars and add on the interest rate, say 20%: (20%)($1,000) for every year of repayment. Alternatively, compounding interest is calculated on the principal amount and also on the accumulated interest of previous periods, essentially “interest on interest.” For example, taking that same $1,000, the first year of interest would be (.20)($1,000), and the second year would be (.20)($1,200), because we take year 1's interest into consideration. Make sure to carefully review the terms of your loan to see what kind of interest you are incurring.
Taking the example from the above text, a credit card charge of $1,000 would incur $612 in interest costs if you wanted to pay it off in 5 years. This means that you would be paying 20% interest with an expected payment of $26 a month. It also assumes that you don't make any additional charges to the card. This accumulated interest is 60% of your original loan. Don't forget to consider the interest costs and the timeframe in which you want to pay back your debt when charging a card or taking out a loan.