Debt: A Guide for New Americans
Are you new to the U.S. and find the concept of debt confusing? No worries- you’re not alone! In America, debt isn’t always a bad word. It sounds scary, especially if you come from a culture where cash is king. But debt could help you build a credit score, get a house, or even kickstart a business. If you need more guidance understanding credit, check out Consumer Financial Education: Credit and Credit Reports or check out some of our CalMoneySmart grantees, that specialize in offering support. So, let’s dive right in!
Good Debt vs. Not-So-Good Debt
First off, not all debt is created equal. Getting a loan for a house or education is usually considered “good debt.” Why? Because these things can increase in value or generate income for you in the long run. Think of it like investing in your future. You’re buying something that will pay off later, like building equity in a home.
Building Good Debt: A Smart Start
While we’re on the topic of “good debt,” let’s dig a little deeper into how you can build it sensibly. A key piece of advice is to start small. Taking on too many obligations all at once can become overwhelming and counterproductive. There are some great beginner-friendly options for those just dipping their toes into the world of credit. Participating in a lending circle is a fantastic way to understand the ropes of borrowing and lending in a low-risk environment.
Similarly, a secured credit card can set you on the right path. With this type of card, you deposit a certain amount of money into an account as collateral. You can then use the card like any other credit card. The best part? Paying off your balances on time and regularly can lead to a better credit score and qualify you for a regular credit card.
On the other hand, “not-so-good debt” usually doesn’t have a lasting value. This could include debt from eating out, buying the latest gadgets, or spending too much on fun but fleeting experiences. If you borrow money to cover everyday expenses, that’s a red flag.
How to Manage Short-Term Debt
- Debit/ATM Cards: They work just like cash. Money comes right out of your bank account with no debt attached.
- Overdraft Protection: Imagine being charged a fee every time you spend more than what’s in your account. No thanks, right? To avoid this, link your checking account to a savings account or credit line.
- Secured Credit Cards: Great for building credit. You deposit money into an account, use the card like a credit card, and after seven months of responsible behavior, you could qualify for an unsecured credit card. An unsecured credit card is a credit card you can get without putting down a security deposit.
- Unsecured Credit Cards: Look for a card that suits you. But remember, spending beyond your ability to repay each month can lead to nasty finance charges. An unsecured credit cards let you borrow money up to a certain amount, and how much you can borrow depends on how good your credit is.
- Gift Cards: Super for gifts but terrible for bills. Only use gift cards for payments if you’re 100% certain it’s legit.
- Buy Now Pay Later (BNPL): It lets you break up payments over time, but it doesn’t offer the same protection for your purchases as credit cards. Be careful with these – stacking them means payments (and potential penalties) to manage.
- Earned Wage Access (EWA): Like an advance on your paycheck. Handy but use cautiously to avoid more debt.
- Payday Lending: Short-term loans that come with steep costs. If possible, try to avoid these.
Managing Long-Term Debt
Feeling overwhelmed by your debts? First, breathe. Shame won’t pay off those bills, but action will.
- Get the Full Picture: Know who and how much you owe. There are free financial education programs that can help, like the DFPI’s educational webinars and events
- Plan It Out: Make a financial plan that includes your goals, income, and debts. Add in some savings too!
- Talk to Creditors: Many are open to negotiation, so don’t be shy about reaching out.
- Choose a Payoff Strategy: Options like the Snowball and Avalanche methods can make this process less daunting.
- Seek Housing Help: HUD offers advice on housing issues, so don’t hesitate to look them up.
Avoid Scams and Check Licenses
Before signing any financial contracts, understand what you’re getting into. Confirm the lender is legit by checking their license. Californians can verify these licenses with the DFPI. If you think you’ve been scammed, don’t sweat it; report it. Submit a complaint on our website, or you can even file a complaint in multiple languages through our toll-free hotline at (866) 275-2677.