- Written by Marjorie Daley, author of the New Adults’ Guide to Basic Finances.
Table of Contents
Last updated: April 29, 2025
Loans, credit scores, debt, credit cards, and insurance are very important to understand and to use effectively to help your college plans.
1. Loans
We touched on federal and private loans. Now is the time to expand and explain how loans work. A loan means that you borrow money with the agreement that you will repay a certain amount over a certain time frame. You pay interest to borrow the money. Interest allows the lender to make money on your loan, service the loan, and repay a bit of interest to those who lent them the money. Loans may come with fees, such as doc (document) fees or origination fees that add to the cost of the loan. ALWAYS know what you are signing and what you are expected to repay.
There are two types of loans – secured and unsecured. Within those loans are specialized loans with different terms (repayment, fees, and interest rates). For right now, we are going to address three types – secured, unsecured, and predatory.
Type of Loans
- A secured loan is backed by something of value. For instance, your car loan has the car as collateral for the loan. If you do not pay the loan back, your car can be repossessed and sold to make up for what you did not pay. Secured loans usually come with lower interest rates and better terms. Secured loans include car loans, mortgages, and secured credit cards. A secured loan is a great way to start building credit.
- An unsecured loan only has your promise that you will repay the money. Unsecured loan examples include regular credit cards, student loans, and personal loans. Unsecured loans generally have higher interest rates and require credit checks. The lower your credit score, the higher the interest rates.
- Examples of predatory loans include car title loans, payday loans, and those who prey on the ignorant. Car title loans are short-term (less than a few months), high-interest loans on your car title. If you fail to repay, you lose your car. Payday loans are short-term, high-interest loans against your next payday. The interest rates on both these are usuriously high, up to 400%. This means that for every $100 you borrow, you repay $500. This trap leads you very quickly into extreme debt.
The final category of predatory loans includes salespeople who make promises that they can fit you into a more expensive car or cellphone than you intended to buy. My youngest is an active-duty Marine and many of the businesses around bases are very aware that these young Marines are great targets for predatory sales. My son went into a cell phone store and walked out with a new cellphone having signed paperwork that he did not read for an amount he does not know for terms he cannot state. I was so annoyed with him that I wrote The New Adults’ Guide to Basic Finances.
Interest Rates
Interest rates come in two varieties – simple and compound. The difference is that with compound interest, you pay interest on the interest. Let’s say you take out a simple interest loan for $10,000 at 8.75% for five years. You will end up paying back $14,370. If you take out the same loan compounded monthly, you end up paying back $15,456.05. A simple interest rate example would be a personal loan. Credit cards would be an example of compund interest accounts. Interest can be compounded daily, weekly, monthly, annually, etc. Just read the loan terms carefully!
Following are the formulas for both simple and compound interest:
Simple Interest = P x r x n
- P = Principal amount
- r = Anual interest rate
- n = Term of loan, in years
Compound Interest = P×(1+r)t−P
- P = Principal amount
- r = Anual interest rate
- n = Number of years interest is applied
To get the best terms, you need to have a good credit score and credit report. Next, we’ll take a look at how they are calculated and how to increase your score.
2. Credit Scores and Credit Reports
An important measure of how well you do at repaying your financial obligations.
You’ve probably heard about credit scores on ads and seen clickbait articles about raising your credit scores instantly. It may seem like a mysterious number awarded to you by Them, but it is actually a simple concept that indicates how well you are doing repaying your bills. Here’s how it works.
Three main companies provide credit reports. These are Transunion, Equifax, Experian. Anyone you borrow money from reports to at least one of these companies. They then use a scoring algorithm developed by FICO or VantageScore to give you a number. Because the three companies get different data and use a slightly different algorithm, your scores will vary slightly among the three companies. However, the scores are ranked as follows:
| FICO credit scores | VantageScores |
| Exceptional 800-850 | Excellent 781-850 |
| Very Good 740-799 | Good 661-780 |
| Good 670-739 | Fair 601-660 |
| Fair 580-669 | Poor 500-600 |
| Very Poor 300-579 | Very Poor 300-499 |
If you are getting your first credit report, you should see a score range between 500 and 700. If it is on the low side, you need to take a look at how you are repaying your bills.
The scores are based on five factors that measure your ability to repay a loan and how safe the lender can feel making you a loan. The two main factors, representing more than half of your score, are under your control. These are payment history and credit utilization score.
- Payment history is the largest percentage of your credit score (35%) and 100% under your control. If you miss or are late in making payments, your score drops. If you are trying to improve a low credit score, pay your bills on time. This one action will almost immediately raise your score.
- Credit utilization ratio (30%) is also under your control. This ratio deals with credit cards and other revolving loans (loans where you can use the money over and over again) looks at how much money you could use if you maxed out your credit cards versus how much you actually owe. Your best credit utilization ratio is under 30%.
Here’s how to calculate your credit utilization ratio :
- Add up all the credit limits on your credit cards
- Add up all the balances on your cards
- Divide the balance total (#2) by the credit limit total (#1)
- Multiply by 100
Let’s say you have $10,000 in credit limits but owe $2500. Your CUR is 25%. If it is over 100%, you have (hopefully) made an error somewhere.
To increase your credit utilization ratio, pay down your revolving loans. This is one way that credit improvement companies can “improve” your score. They get your credit limits raised. The problem with that is that it only opens up the road to more debt.
The next three factors together carry the remaining 35% of your score. These are the length of credit history, credit mix, and recent applications.
- Length of credit history represents 15% of your score. You need at least six months of credit reporting to have a credit score. The older your credit history, the better your score. If you have no credit history, your credit report is “thin.” To get a score, consider taking out a secured credit card or a secured credit builder loan. A secured credit card has a savings account (collateral) behind it that guarantees you will repay the card. As long as you repay the card every month, the collateral is not touched, and you get a positive report. A secured credit builder loan puts the loan into a savings account to act as collateral. After you repay the credit builder loan in full, you get the money in the savings account.
- Credit mix means that you have a variety of loans in your history. Some credit mix examples would be car loans, mortgages, credit cards, personal loans, etc. The problem for most people starting college is they usually do not have a mix. Besides taking out a mix of loans, you can report your rent payments to Experian Boost (or pay a reporting service to do the same to all three). You may want to consider taking out a credit builder loan to add to the mix.
- The final factor is recent applications. This is also 100% under your control. Recent applications are “pulls” on your credit history. There are two types of pulls: soft and hard. A soft pull releases a limited credit report to potential employers, landlords, or for pre-screening loans. Soft pulls do not affect your credit rating. A hard pull releases your entire credit report. You have to sign a document allowing a hard pull. If you apply for a credit card, it will be a hard pull. This is why you should never apply for the store cards just to get a percentage off today’s purchase. Not only do you have another credit card to whip out and max out, but you have a hard pull that has a short-term effect on your credit score. We’ll discuss how to stop hard pull under the scams section.
Now that you understand where your credit score is coming from, you need to check it. You are entitled to one free credit report a year from each of the big three. Experts recommend getting one report every four months – for instance, in January, you request a report from Transunion, in May you request one from Experian, and then in September from Equifax. The following January, you repeat the request sequence.
To get your free report, contact:
- TransUnion
- Experian
- Equifax
When you get your report, examine it closely. If you find errors, you can report them and have them removed from your report.
3. Debt
Debt is part of American life; the goal is to keep it as low as possible.
Debt is part of American life. In part, it is because the cost of living has risen far faster than income. The other part is because we are sold a lifestyle through media and influencers that involves spending a lot of money on stuff. As a result, people under 35 have an average of $67,400 in debt. Of that, 20% is credit card debt and 21% is accounted for by student loan debt. If you are reading this article, hopefully, you are trying to limit both your credit card debt and your student loan debt.
Debt is defined as money you borrow that allows you to purchase items. Debt can be divided into three categories: good debt, bad debt, and grey debt.
- Good debt includes the purchasing of items that increase in value after the purchase. These include:
- Mortgages
- Home equity loans
- Student loans
- Small business loans
- Bad debt includes items that decrease in value after purchase. This includes:
-
- Clothing
- Appliances
- Entertainment
- Vehicles
- Credit card debt
- Payday/car title loans.
- Grey debt includes purchases that may be good on the surface but cross into bad debt because of poor spending habits. For instance, student loan debt means you are getting an education that will hopefully improve your life and your income. It becomes bad when you take on excessive amounts because you chose an expensive school, misspent the loans, or chose a major where the future income does not match the cost of the education. Anything that is “good” debt can easily slide from good to grey to bad with bad choices.
Types of Debt
There are five basic types of debt with a lot of crossover among the types of loans. These include:
- Secured
- Unsecured
- Mortgages
- Revolving debt
- Term loans
If you remember, a secured loan has collateral backing it – a car loan is an example. An unsecured loan has no collateral backing it. Student loans are an example. Mortgages are a special type of secured loan that involves large sums of money and long repayment terms. Revolving loans are credit cards (unsecured) and other loans that may be secured that involve a set limit and you use that money but repay it with interest and then can reuse the loan. Term loans are personal secured or unsecured loans that have a set period to repay all the money. An example is a car loan or a student loan.
As we discussed earlier, you will have fees and interest. Fees are either paid upfront (mortgages) or rolled into the amount of the loan. Interest is money that you are charged to borrow money. It can be simple or compound. With a simple loan, you repay the principal and interest, and the cost remains the same for each payment. For instance: you take out a simple car loan:
- Car loan: $10,000
- Interest rate: 2.49% APR (annual percentage rate) or 0.2075% per month
- Time to repay: 5 years (60 months)
- Monthly payment: $187.42
- Total interest paid: $1245
- Total amount to repay: $11,245
It is far easier to get in debt than to get out of debt. For people under 35, student loan debt is one of the most common forms of debt. We are now going to discuss the second most common form of debt, credit cards.
4. Credit Cards
A necessary evil. Use with discretion.
Credit cards are convenient and accepted almost everywhere. You need one to rent a hotel room, buy an airline ticket, or rent a car. They are far safer to use online than debit cards and safer to carry than wads of cash. They are also easy to use and easier to abuse.
First, let’s look at what a credit card is. A credit card is a revolving, secured, or unsecured compounded monthly loan that you access using the card. As with all loans, you apply, and the credit card company looks at your credit report to determine your credit limit and interest rate. When you use a credit card, you use part of that credit limit and then must repay it.
Credit Card Terms
Credit cards come with their own terminology and understanding them can prevent unpleasant surprises. Be aware that credit cards put the good stuff in huge fonts and the important, unpleasant stuff in tiny font to make it harder to read. ALWAYS read and know what you are agreeing to. Otherwise, you will be surprised and not in a good way.
- APR or Annual Percentage Rate: How much interest you pay over one year on any charges not paid off immediately. APR is based on the prime rate plus how much risk the lender feels it is taking. You do not have just one APR, you have many! The list below includes all the APRs currently possible. Since credit card companies make their money off APRs, there may always be more in the works. These include:
-
- Balance-transfer APR is applied to charges transferred from another card.
- Purchase APR is charged on purchases.
- Cash advance APR is charged on cash advances.
- Introductory APR is an excellent interest rate charged for a limited introductory period.
- Variable APR changes with the prime rate.
- Fixed APR does not vary but can be changed by the lender with notification.
- Penalty APR is charged if you miss a payment or make a late payment.
- Credit Limit or Line of Credit or Spending Limit: How much you can “borrow” on your credit card as determined by your credit report. If you have a secured card, your credit limit is the amount of cash you have deposited with the credit card issuer.
- Balance: How much of your credit limit you have used and how much is revolving. For instance, if you have charged $1,000 on your card and you pay off $600, your balance is $400.
- Balance Transfer: Transferring the balance on one card to another card to get a better interest rate.
- Billing Cycle: The amount of time between one statement closing date and the next closing date, legally no less than 21 days.
- Cash Advance: Borrowing money from your credit card. Cash advances have an extremely high APR and no grace period.
- Fees: Credit cards make a killing off their fees. Not all cards have all the fees, but all of the cards have some fees! Here are a few of them.
- Annual fees – charged using the card.
- Balance transfer fees – charged on balance transfers, usually 3%- 5%.
- Cash-advance fees – 5% of cash advance or $10, whichever is greater.
- Foreign transaction fees – charged on purchases made outside the US, usually 3% of charges.Late payment fees – applied if you miss your payment date. You can be charged $29 for first-time instances and up to $40 for subsequent missed payments over the next 6 billing cycles.
- Grace Period: The amount of time between the end of the billing cycle and when your bill is due. You accrue no interest during the grace period. Grace periods do not apply to cash advances or balance transfers.
- Minimum Payment: The smallest amount you must pay each month.