If you have children going off to college this year, and don’t already have an exaggerated list of study requirements mapped out for them, it’s wise to suggest they learn more about their credit score.
I did for my son, who is starting his senior year in college and he gave me pretty much the response I expected: “Huh? What’s a credit score?” Junior II said.
“And why do I need one?”
Junior II (he’s the second of three sons, now all at varying stages in college) is a smart, but fiscally conservative student, who guards $10 the way Brinks guards $1 million. He’s never had a credit card and never wanted one because “I don’t want to owe anybody money.”
That’s good, but he’s nearing the stage where pretty soon he’ll be going solo on everything – finances included – and it will be a benefit for him to arrive there with a good credit score in hand, says Rod Griffin, the Director of Public Education for Experian.
“Credit reports and credit scores play an important part in establishing yourself as an independent adult,’’ Griffin said. “It is important to establish a strong credit history before leaving college.”
Credit Scores Reward Responsibility
For me, that means taking on responsibilities like credit cards and monthly payments for rent, utilities and cell phone. College is a great time for young adults to test their financial boundaries and learn the consequences of responsible and irresponsible behavior.
Their credit score is a perpetual grade on the subject.
The reasons for doing this become obvious as soon as they graduate. If Junior II wants to declare his independence and rent an apartment or house, the landlord will look at his credit report. If he tries to buy a car, the dealer will look at his credit report. If he wants his own cell phone, the provider will look at their credit report.
Most importantly, a survey by the Society of Human Resource Management said that 47 percent of employers do a credit report check on job candidates as part of their hiring process. So, depending on where he applies for work, Junior II may need a good credit history to get a job.
“Credit history often affects young people in ways they don’t understand or expect,” Griffin said. “A good credit report resulting in strong credit scores will help a person qualify for lower interest rates for credit, pay reduced security deposits for utility and other services and lower their cost for other financial transactions.”
Start With A Credit Card
With so much riding on a subject that is never mentioned outside a College of Business class (and barely mentioned at all there) the only way to learn about credit scores is through experience.
The first step is to get a credit card. Yes, it’s a financial hand grenade in the hands of some people, but with responsible use, it’s the easiest way to get on the board with the credit reporting bureaus.
The good news for parents is that while credit card use is down considerably among college students – 84 percent had one in 2008, and just 30 percent used one in 2013, the latest survey done by Sallie Mae on the subject – they are far more responsible with them. Nineteen percent of the seniors in 2008 graduated with more than $7,000 in credit card debt. The 2013 class survey says 62 percent pay their entire balance every month and 33 percent make at least the minimum payment, most of them paying much more than that.
I told Junior II to apply for a credit card on his own and he got his first choice, with a $1,000 credit limit. If your student doesn’t hit on his own, you can help him get one by being a co-signer or putting up a $300-$500 deposit so he can get a secured credit card.
Pay Off Balance Every Month
Once they get a card, the most important thing a student can do is use it … sparingly. The three credit bureaus that measure everyone’s use of credit – Experian, TransUnion and Equifax – like to see card owners use 30 percent or less of the buying power on their card. If the credit limit is $1,000, then spend $300 or less a month, unless an emergency occurs.
The next step to credit score success is to pay the bill promptly at the end of the month. Not just a minimum payment, the whole balance. Avoid credit card debt at all costs. One missed monthly payment can cause your credit score to drop from 60 to 110 points. That’s why it’s good to start with one, at most two, credit cards. Multiple cards create multiple problems.
Students can add to their credit score by making timely payments for rent, utilities and cell phones. Skipping out or paying late consistently on those monthly bills will get back to the credit reporting agencies and have a damaging effect on credit scores.
Likewise, regular payment on this group of bills is considered an installment payment and will help credit scores. The small percentage of college students paying off auto loans and/or mortgages, receive the same benefit, if they keep pace with payments. The credit reporting bureaus like it when you demonstrate that you can handle revolving (credit card) and installment (rent, utilities, car loans, etc.) payments every month.
Good Credit Score Can Open Doors
Each of these learned habits will contribute to a very positive credit score coming out of college, which statistics say will be needed. According to Credit Karma, average credit score for ages 18-24 is 563, which falls in the “poor credit” scoring bracket.
That score might get them into some apartment complexes, but not many. An auto loan likely would carry a 20 percent or higher interest rate. A cell phone contract would be difficult to get and might require a deposit of $150 or more.
Add 100 points to that credit score – making it an easily obtainable 663 – and the door swings wide open for rents, car loans and cell phone service.
“Building a good credit history doesn’t require a lot of credit accounts,” Griffin said. “Having one or two credit cards, making a small purchase each month and paying the balance on time and in full will create a positive credit history and be reflected by good credit scores in a fairly short period of time.”
Junior II, who now understands the value of a credit score, is shooting for above 700 by the time he graduates. Not sure what his reward is going to be if he grades out that high, but I’m leaning toward letting him be financially independent for the rest of his life.