There is a four-letter word that can terrify even the most ambitious and forward thinking Millennial, and that word is debt.
As a CPA, and an advocate for financial literacy, I have witnessed people wince at the mere mention of the word — this is not without reason. The financial crisis that began in 2008, and is still having a negative effect on the economy, highlighted and revealed some of the dramatic consequences that overdoing it on debt can have. While the worst of the financial hangover may have receded, although not too far from the headlines, the specter of debt still hangs heavily over Millennials.
Especially for Millennials seeking to start a business, often while juggling student debt and keeping an eye on credit card debt, the idea of taking on more debt can stop a great idea before it even starts. It doesn’t have to be that way, debt doesn’t have to be a four-letter word, and the first step to feeling more confident and comfortable with using debt is understanding some of its key points. Debt is a tool, and like every tool it comes with an instruction manual.
Let’s take a look at some the basics every Millennial, for personal or entrepreneurial reasons, need to know about debt.
1. Credit = debt
I thought we might as well get this out of the way before we move any further. Credit, whether it is talked about for a Fortune 100 company, your startup, or your personal credit cards, is, in essence, another word for debt. If someone is extending credit, be it on a credit card or line of credit, you are incurring debt that you must pay back in the future.
2. Credit utilization
Yes, we are diving right in! This is not as bad as it sounds, and can be explained better using an example. Let’s say you have total available credit of $50,000 and currently have $20,000 being used — that means your credit utilization ratio is 40 percent. Why does this matter? It matters because the higher your utilization rate is, the higher risk you represent to future lenders, and this will mean you will pay higher interest rates on future borrowing.
3. Use your credit
Building a credit history is critically important, especially for Millennials seeking to purchase a home, obtain financing for higher education, or take out a business loan. The only way to build that history, which increases the likelihood of you receiving financing with terms you can live with, is to actually use your credit. Credit cards are not a trophy so dust them off and use them, but use them wisely. The emphasis is on that last word, wisely.
4. Know what you spend
I get it, using Uber, Amazon Fresh, and Netflix make putting almost everything on a credit so simple and painless you can almost forget you are doing it. This is a pitfall that I have seen far too many times — you need to know what you are actually spending, track it, and realize if you are putting those items on a credit card. Getting a handle on that helps you build a plan to use your credit responsibly, and pay it down in a proactive manner.
5. Fees and interest
There are some credit cards right now that, for a fee, offer some impressive sounding perks and benefits for their users. It is important to remember, however, that in order to get most of these benefits you have to put quite a bit of money onto these credit cards. This is all money that you have to pay back, with interest, and possibly pay back with fees depending on the timeliness of your repayment. Remember, fees and interest are dollars that you pay, but these dollars do nothing to reduce what you actually have to pay back. I always advise to avoid them at all costs.
Debt, or credit, can be a topic that not everyone is comfortable talking about, but it is something that every Millennial has to talk about and understand. Debt is a tool that can help you start a business, purchase a home, or even just increase your convenience on a day to day basis, but you have to make sure to use it wisely. Better informed people make better decisions, and hopefully this has helped you become a little wiser to the world of credit.