When I left home as a college student, almost a decade ago, I was on cloud nine. I’d just graduated from high school, and despite not having a college savings account to speak of, I was given thousands of dollars in financial aid to help pay for college.
In my eyes, living was going to get good; and I took full advantage of my new-found funds by going on shopping sprees with friends and living in the dorms — even though my university was only five minutes away from home.
Comfort and leisure were my top priorities at the time, while learning about personal finance, banking and responsible money management didn’t make the cut into my top 10 list of important matters. In hindsight, there are three specific things that wish I knew — and cared enough to understand — from day one, which would have derailed my bullet train of debt.
1. Interest Rates Make a Huge Difference
Before signing up for my first credit card, I thought I knew the answer to the question: What are interest rates? But really, all I knew back then was that they’re what banks charge you for letting you borrow money through a loan or credit card, and I thought knowing that generalized definition meant I knew their implications on my finances.
Well, what I didn’t know is when a credit card interest rate was too high. All the credit card offers I received in the mail came with rates as high as 20% to 25%, and since I received so many similar interest rate offers, I believed a 20% rate was normal.
Wow, was I wrong; it was certainly the average credit card rate range for a typical 18 year old with absolutely zero credit history, but little did I know that it was far from a good rate.
Years later, after proving my creditworthiness, I now enjoy lower credit card rates at 9.99% APR, but to this day I’m still amazed at how naive I was about the stark difference between a 10% rate and one that’s more than double.
Another thing about interest rates I hadn’t known when opening a bank account in college was that I could actually earn interest (instead of paying it) via my checking and savings accounts. While deposit rates are at near zero these days, I could have taken advantage of slightly higher rates a decade ago; now, my savings account yields me a pathetic $0.01 per month for a grand total of 12 cents a year — I just found a quarter on the street the other day that produced more competitive gains than that!
Lesson: What are interest rates? Before assuming you know, learn how banks set interest rates.
2. Getting Out of Debt Is Harder Than It Sounds
Although I hate to admit it, I realize I suffered from something that many of my Gen Y peers are afflicted with: I felt entitled to a better standard of living than I could really afford. After all, I worked rigorously in high school with my nose in books and shouldered multiple AP classes each school year to get early college units, so why shouldn’t I benefit from the perks of my student loan funds?
Despite accumulating about $7,000 in debt from using credit cards during college, I still didn’t think I went overboard with borrowing money. I justified my actions with the expectation that I’d find a full-time job, which would wipe this financial nuisance away within a year or two.
That’s until the recession hit, and after graduating in 2008, I struggled to find employment and realized a scary fact: I conveniently neglected to factor in the approximately $30,000 in student loans I took out over the course of my undergraduate and post-graduate education.
Still, I was optimistic that the generous 10-year payment plan I was offered by my lenders would only make a dent in my day-to-day spending. Yes, I had the delusion that I wouldn’t even notice a $300 student loan payment sucked out of my bank account each month. I was wrong again.
Lesson: No matter how young you feel in college, it’s time to grow up and acknowledge that getting out of debt is no picnic. It hurts and it’s hard; debt-free is the way to be, kids.
3. You Should Shop Around Before Opening a Bank Account
When it came down to opening a bank account, I couldn’t tell the difference between one bank and another. At the time, I didn’t even know that local banks and credit unions, whose products and services are typically more competitive, even existed. All I knew about banks was what I watched on TV commercials and the name of the institution where my parents banked.
So when I chose my first bank, I just went with what my parents used. I asked zero questions and didn’t comparison shop between various banks. I simply walked in, took a seat with the nearest available representative and said, “I want to open a checking account.”
Had I done some research, I would have learned that other institutions might have had a special promotion, lower bank fees and account balance requirements, and better overdraft policies than the one I encountered with my default bank.
Lesson: You can’t only base your personal finances on the choices of others, consider your own needs and priorities.
Keep reading: How to Spot the Best Credit Union or Bank in Your City