As a student, it might not seem like you have the chance to build a good credit profile, especially when the loans far exceed your current income. But now is the best time to begin planning for your future as an independent adult.
A good credit rating is essential for access to the best financial products, lower interest rates, buying a car, and getting a mortgage.
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What is Net Worth?
Your net worth is your assets minus your liabilities. It’s the difference between your money in the bank, any property, and investments, etc., and the money you owe (e.g. loans, mortgage, car payments).
Not many students have a property portfolio to offset the value of student debt. But understanding the concept of net worth and taking steps to nurture it will be incredibly beneficial for you in the future.
How to Build Net Worth as a Student?
Typically, the advice to build net worth as a financially independent adult involves reducing high-interest debt, increasing income, and increasing your retirement contributions.
As someone just starting out, the best way to begin building your net worth is to prioritize your credit score. Over time, you will save a substantial amount of money by taking advantage of lower interest rates offered to those with good credit scores.
If you then invested that money, you could significantly increase your returns and your net worth. On the other hand, what if you wait until you’re ready to make that large purchase?
When you delay thinking about your credit score and building your net worth, you risk causing unnecessary delays to the process, or you might be even tempted to overpay on interest because nothing better is being offered. It can cost you $100s every month in unnecessary payments that could be better spent on things that bring you value.
How to Grow Your Credit Score?
Debt is a part of life, and how you handle it is vital to your future financial opportunities. Your credit score tells banks and other credit providers that you are (or are not) reliable. A good score reassures lenders that they will get their money back, and they reward you for this assurance with lower interest rates and increased options.
Your credit score is reactive to your financial responsibility. If you pay your bills on time, your score can increase accordingly. If you fail to pay, your score can drop.
Students don’t typically have a history of timely payments for bills. One of the most efficient ways to begin improving your score is to have regular bills paid from your account, on time, every time.
Can a Credit Card Help Build Net Worth?
If you want to improve your credit score (and net worth) without signing up for unnecessary services, you might consider using a credit card. Using it to pay for daily expenses and repaying it monthly will establish that you are a responsible borrower.
While debt does detract from your net worth (assets – debt = net worth) showing a positive payment history can serve you well later in life.
Using a student credit card for your weekly shopping or using it to pay for your entertainment (such as going to the cinema, restaurants, etc.) and then repaying the balance each month can keep you within your budget, prevent a build-up of debt, and contribute to a good credit score.
You can also take advantage of the deals offered on student credit cards. These might involve store discounts, cash rewards, or sign-up bonuses.
These should always be a secondary consideration when choosing the right card for your needs. If you would like to explore the potential offered by student credit cards and take responsibility for your credit rating, look at reviews comparing the best student cards on the market.
This is not a decision to be made lightly. Consider your budget and your ability to keep on schedule with repayments. Failing to repay can have a lasting, detrimental impact on your credit rating.
Reduce Debt Now to Save a Headache Later
Some students may have accumulated debt (outside of their student loans) before realizing how much of a negative impact it can have on their financial outlook later.
Reducing debt can tip the balance of your income/debt ratio. One option for paying off student debt is to consolidate debt using a 0% balance transfer credit card.
You then have one monthly repayment and slow the rate at which the debt increases due to interest. If you have a lot of debt, you may have to consider cutting out some luxuries and/or taking on more work to repay faster.
As your debt goes down and your net worth increases, the amount you’ll save in interest fees will be noticeable.