Hello! Welcome to Lesson 1 of Financial Health 101: Debt and Student Loans, a free short course from Justworks.
The goal of this course is to help you feel in control of your financial health, especially while you pay off student loans and other debt. In this course, we’ll cover debt, credit, prioritization strategies, repayment options, budgeting, expenses, saving, retirement, and more fun (ok, maybe not fun - but important) money topics.
Understanding how everything works together will help you lay the groundwork for a solid financial foundation.
In this lesson, we’ll go through the fundamentals:
A quick breakdown of a student loan
Good vs bad debt (and why it matters)
What you should know about your credit score
Let’s get started.
As a warm-up and good entry point for financial health fundamentals, let’s begin with a quick breakdown of a student loan, the money borrowed from a bank or other lender to pay for educational expenses.
The real story is in the payment terms. As you’ve probably seen in your monthly student loan statements, there’s a labyrinth of lingo. We’re going to focus on three key terms today:
Principal. The amount you borrowed is the original principal. The amount you have left to pay is the unpaid principal.
Interest. The cost of borrowing money. Essentially, the charge for the time you have the loan. How much you are charged is based on the interest rate, calculated as a percentage of the amount you have left to pay. If your loan has an interest rate of 6.3%, then, over the course of a year, you will be charged 6.3% of the unpaid principal each time a payment is due.
Minimum. How much you owe each month. It’s generally some mix of interest and principal, based on your loan type and repayment plan.
Why It Matters
Payments are applied to interest first, then principal. If you don’t pay at least your minimum - or skip a payment entirely - it will almost always cost you more in the long run.
Debt is money owed by one party to another. For example, student debt is money owed to a student loan lender. Credit card debt is money owed to a credit card company. Debt can generally be broken down into one of two buckets:
Good debt, such as student debt, creates value in the long run. Having a degree will help prepare you for a career with higher earning potential. Good debt generally carries a lower interest rate, which means it costs less to borrow.
Bad debt creates no real long-term value. Credit card debt is an example of this. It is generally used to buy something that is non-essential and will quickly lose value. Bad debt carries a high interest rate, so it is more expensive.
Why It Matters
To achieve financial health and meet your financial goals, you need to know what kind of debt you have. This will inform the approach you take to paying it off.
It’s also worth noting that good debt can become bad debt if you miss payments or if it goes into collections.
Are you financially trustworthy? Banks, lenders, and even landlords use credit scores to decide. Generally ranging from 300 to 850, a credit score rates how likely you are to repay debt. It’s like your GPA for financial health and reliability. The higher the score, the better.
Why It Matters
When you have a good credit score, you are more attractive to potential lenders and can get access to lower interest rates on many credit cards and loan products. That means it will cost you less to borrow money. You can even get access to higher credit limits.
A good credit score also improves your chances of getting approved for things like mortgages, renting an apartment or home, and (drumroll) new lines of credit.
So, having a good credit score is important for your financial health. Now, let’s dive into what goes into that score.
What the FICO?
Here’s one acronym worth knowing. FICO stands for Fair Isaac Corporation, the company that developed the most widely used credit score. When people in the U.S. talk about credit score, they usually mean FICO score. A FICO score takes into account your credit score across the three big credit reporting companies: Equifax, Experian, and TransUnion. VantageScore is another example of a hybrid credit score.
Tip. If you’re doing everything right to raise your FICO score, your score should go up across the board.
But, What Is It?
FICO scores for most people are broken down like this:
Here’s what doesn’t impact your FICO score:
Receipt of public assistance or credit counseling
Family support obligations
Interest rates you pay on your accounts
You or lenders checking your credit score
Credit Score vs Credit Report
Not to get into semantics, but there is a difference between a credit score and a credit report, and it’s worth knowing.
The three-digit number that rates how likely you are to repay debt. Usually the FICO score.
The details that your credit score is based on. It includes:
Personal information, like your name, address, birthdate, and social security number
Public information, like bankruptcies or foreclosures
Credit account information, like payment history and account balances
A list of everyone who has checked your credit report in the last two years
How to Get Your Credit Report (For Free)
By law, you are allowed to access your credit report for free once a year from each of the three big credit reporting companies. You’re also entitled to a free copy if any of the following occur:
You are denied credit, insurance, or employment based on your credit report (you have to request your free report within 60 days of being denied)
You are unemployed, but intend to starting looking for a job within 60 days
You are on welfare
Your report has an error due to identity theft or other types of fraud
There are a few places where you can get your free credit report, but www.annualcreditreport.com is the only website with a stamp of approval by Federal law. It’s a good place to start.
Whatever your financial goals, your credit score will play a big role in how you get there. This is why having the right approach to paying off debt is so important. If you miss payments, increase the balance owed on credit cards, or accumulate too much bad debt, your credit score will take a hit.
In the next lesson, we will dive into how to build a solid financial foundation and create a plan of attack for knocking off debt the right way.
This material has been prepared for informational purposes only, and should not be relied on for, legal, tax, or financial advice.