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Reflect on Learning: Many young people graduate college with a great deal of student debt. They cannot afford to buy a home or save for retirement. Yet student debt is still considered “good debt”. Why? Answer: The type of debt is not the problem. The availability of money (capital) to fund education is a great thing! However, postsecondary education is very expensive (many say too expensive) which forces students to take on too much debt. The cost of college and the amount of debt are the culprits. Don’t skip college to avoid student debt, but do try to take on as little as possible and try to fund as much of it as possible through scholarships and a part time job, rather than loans. Car Loan. With the exception of rare collectibles, a car is not considered an investment. However, a car has been identified by economists as an essential wealth building tool . This is because most Americans do not live near convenient and effective public transportation, so a car is a necessity for getting to and from work each day . A car also expands the geographic area within which a person can be employed, improving their prospects for earning a better income and advancing their career. A car loan is considered by many financial experts to be good debt. Nevertheless, a recent college or CTE grad with student loans and starting salary shouldn’t be buying a luxury or high-end car. Good debt has limitations. Reflect on Learning: Cars don’t increase in value. Nevertheless, can you understand why a car loan may be considered good debt? Answer: Without a car, employment prospects may be limited by distance, which can inhibit income and ability to build wealth. The mobility a car provides can increase employment options, which may increase wealth. Home Loan. At some point in your late 20s or early 30s, you will probably consider buying a home. It is highly unlikely that you will be able to purchase one without a loan. In spite of the high cost of real estate, homeownership remains one of the best ways to build wealth. A home is a valuable investment which often increases in value over time and has many other long term financial benefits. For that reason, a home loan is considered “good debt”. The federal government encourages homeownership through tax and other policies because it promotes financial stability and wealth building . You will learn more about the benefits of homeownership in a later chapter. VI. Credit Reports, Credit Scores and DTI Ratios Your first experience with credit will likely be a student loan. At some point after that, you may get a credit card, buy a car, or even purchase a home. Unfortunately, you can’t just walk into a bank and get a loan. Getting a bank or any other creditor to lend you money can be difficult. Understandably, lenders want to make sure they’ll be repaid, so when you apply for credit, the first thing a prospective lender will do is check you out to determine how likely you are to repay the loan. They want to know whether you are a risk to lend money to, so they will review your credit report, credit score, and debt-to-income ratio: Credit Report. Lenders share information about their borrowers with companies called credit bureaus . The shared information is compiled into a credit report which lists your name, address, Social Security number, all of the credit cards and loans you have, how much money you owe on them, and whether you pay your debts on time. A credit report will show any public record information such as bankruptcies, foreclosures, and whether anyone has sued you to collect a debt, including child support payments. Some well-known credit bureaus are Equifax , TransUnion , and Experian . PRODUCT PREVIEW
THE 21st CENTURY STUDENT’S GUIDE TO FINANCIAL LITERACY 121
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