Credit and Debt Made Simple: How to Balance Your Finances

07 Feb 2025

6 Min Read

Public Mutual (Partner Contributor)

IN THIS ARTICLE

Learn how to manage credit and debt with Public Mutual to improve your credit score, reduce debt, and secure a healthier financial future.

College life is an exciting chapter filled with new experiences, friendships, and opportunities. But along with the fun come newfound responsibilities—including managing your finances. You've probably heard terms like 'credit,' 'loans,' 'interest rates,' and 'debt,' but how do they impact your future?

Whether you're funding your education, buying your first car, or covering everyday expenses, these concepts play a crucial role in achieving your goals. Credit can be a powerful tool, but if mismanaged, it can lead to unmanageable debt. Knowing how to navigate credit and debt early on can set you up for long-term financial success.

Don't worry if this all feels overwhelming! This guide breaks down these concepts and offers actionable tips to help you build smart financial habits—without the mental strain.

What Is Credit?

Definition

Credit is the ability to borrow money from a lender with the agreement to repay it later, usually with interest (an extra charge for borrowing). It represents the potential to incur debt but isn't debt itself until money is borrowed. Think of it as a tool for accessing funds or purchasing power.

Common Types of Credit

Credit Cards: A revolving line of credit that lets you borrow up to a set limit. You can repay the full balance or make minimum/partial payments, with interest charged on any unpaid amount.
Loans: A fixed amount of money borrowed that you repay in monthly instalments, usually with interest. Common types include student loans, personal loans, and car loans.

Building Credit Without Falling Into Debt

Building a solid credit history is important because it impacts your ability to secure future loans, get favourable interest rates, and even rent apartments or secure employment in some cases. Responsible credit use, such as making timely payments and keeping your balances low, will help you build a positive credit score. A good credit score can save you money by qualifying you for lower interest rates, while poor credit can increase your borrowing costs.

While credit is a valuable tool, it can quickly turn into debt if not managed properly. For example, using a credit card to buy something you can't afford and not paying off the full balance by the due date creates debt. Repeatedly carrying a balance leads to debt accumulation due to interest and various fees, such as late payment fees, making it harder to repay the amount owed. To stay financially healthy, it's crucial to understand how credit usage can lead to debt and learn ways to manage it effectively.

What Is Debt?

Definition

Debt is the total amount of money you owe after borrowing, including the original amount (principal) and any interest or fees that add up over time. Think of it as what you owe after taking out credit.

Types of Debt

Not all debt is created equal. Some types can help you achieve your goals, while others can weigh you down and hinder your financial growth. The key is understanding how credit usage influences the kind of debt you accumulate and managing it responsibly.

Good Debt: Comes from responsible credit use that contributes to your long-term financial growth. Student loans, for example, help fund your education, which is an investment in your future earning potential. Similarly, taking out a loan to enrol in a professional certification course can enhance your career prospects, while borrowing to start a small side business can generate extra income. These types of debt can provide long-term benefits and improve your financial standing over time.
Bad Debt: Results from careless credit use on items that provide little or no long-term value. For instance, using a credit card to dine frequently at expensive restaurants or buy the latest gaming console you can't afford might seem harmless at first but can lead to financial trouble. Additionally, Buy Now, Pay Later (BNPL) services can tempt you into purchasing trendy clothes, luxury bags, or designer sneakers you don't need, creating a cycle of debt if payments pile up or are missed.

By leveraging credit wisely and distinguishing between good and bad debt, you can ensure your borrowing supports your future goals rather than jeopardising them.

Managing Debt Responsibly

Now that you understand the difference between good and bad debt, the next step is learning how to manage your debt responsibly.

Create a Realistic Budget: A clear budget helps you understand your income, track spending, and allocate funds, ensuring you can prioritise what needs attention first. If you're unsure where to start, check out our guide to budgeting below for a step-by-step approach.
Pay on Time, Every Time: Late payments might seem like no big deal at first, but they can snowball into bigger problems, like damaging your credit scores and incurring added fees over time. Set reminders and automate payments, if possible, to stay on track.
Pay More Than the Minimum: Whenever possible, put a little extra towards your debt payments. This helps you pay off debt faster and saves you money on interest.
Build an Emergency Fund: Life happens—unexpected expenses can pop up anytime. That's where an emergency fund comes in. Even a small financial cushion can keep you from relying on credit and help you stay on top of your debt repayments. Consider the Emergency Reserve Account from Public Mutual; it's a simple and convenient way to build your financial safety net with the right tools and support.

Avoiding Common Credit Pitfalls

As you work to manage your debt, it's equally important to avoid common credit mistakes that can undermine your efforts to reduce debt and improve your financial situation, especially if you're new to handling credit.

Know Your Credit Terms: Before committing to any credit, take time to understand the terms and conditions. From interest rates and fees to grace periods, being aware of these details can help you avoid unexpected charges and costly mistakes down the line.
Limit Credit Applications: The freebies and enticing offers that come with credit cards can be hard to resist. However, applying for too many cards in a short period can negatively impact your credit score. Only say yes to new credit when it's absolutely necessary—not just for the perks.
Control Credit Card Spending: It's easy to overspend on non-essentials, and this can quickly spiral into debt. A good rule of thumb? Keep your spending below 30% of your credit limit. This helps you to stay in control and maintain a healthy credit score.
Be Cautious with Buy Now, Pay Later Offers: While these services seem convenient, they can encourage overspending and lead to hidden fees. Before hitting 'Confirm,' always double-check if you can afford the full cost, and be sure to read the terms and conditions carefully.
Avoid Predatory Lending: Be wary of loan offers that seem too good to be true. High interest rates and hidden fees can trap you in a cycle of debt.

Conclusion

Understanding how credit and debt work together may be daunting at first, but with the right knowledge and habits, you can confidently navigate your way to great financial opportunities without falling prey to temptations. Imagine the possibilities: graduating without a mountain of debt, buying your first car, or even launching your own business. Responsible credit use and smart debt management can turn these dreams into reality.

For more tips on managing credit and debt wisely, explore Public Mutual's financial literacy resources on their Instagram, TikTok, and website.

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