Many Americans 18-24 are wielding credit cards responsibly, but there’s a need for more credit education, a new Equifax study and money experts say.
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While American college students know the basics of credit, fewer than half have actually checked their credit scores. That’s the most surprising finding of a new Equifax study released in August.“My No. 1 rule is to pull your credit reports,” says credit coach Jeanne Kelly, owner of the Kelly Group Consulting. “Review them to make sure they are accurate.”
While many students aren’t checking their credit reports, the survey found that 62 percent were aware that they could get their credit reports for free.
“It is amazing how a high number of students realize they can get their scores for free, but they aren’t doing that,” Kelly says. Maybe it’s “just the busy college lifestyle.”
Or maybe “Students don’t understand the magnitude of what a credit score can do to you,” says Wayne Sanford, a credit expert and owner of New Start Financial in McKinney, Texas. “They don’t think about the ramifications of a missed payment.”
Sanford likens that three-digit score to a crystal ball that bankers use to assess creditworthiness for car loans and home mortgages. For many students, owning a car or a house just aren’t on the radar.
“Students have no incentive to think long term,” he says. They often are more concerned with rent, cellphone charges or electricity bills.
Students don’t understand the magnitude of what a credit score can do to you. They don’t think about the ramifications of a missed payment.
|\u2014 Wayne Sanford|
Owner of New Start Financial
Good credit practices, despite gaps in credit knowledge
Despite students not knowing their credit scores, or even exactly what goes into a credit score, the Equifax study found that many students are practicing good credit behavior.
For example, 90 percent of college students with credit cards say they pay off their balances every month (72 percent pay it themselves; 18 percent say their parents pay it). Of those who carry balances, 59 percent said they plan to pay them off within a year.
“This generation, despite being bombarded with information from a variety of sources, is developing credit-smart behavior early on,” Melanie Wing, vice president of customer insights at Equifax, said in the news release about the study.
David Weliver, founding editor of Money Under 30, a personal advice blog, agrees. “Young people are a lot more careful about credit now,” he says. There’s a sense of caution, he adds. But while younger millennials appear to almost shun credit, nearly 70 percent of the college students surveyed reported having one or more credit cards.
And young people — whether millennials or college students — need “a lot of education about what affects their credit scores,” Weliver says.
Students could use some lessons in credit
While the Equifax study found college students showed a general knowledge of the factors that impact credit scores, there also were misconceptions.
Survey respondents accurately selected as credit scoring influences:
- Paying bills on time (73 percent)
- Amount owed on credit cards or loans (66 percent)
- Types of credit/loans (59 percent)
- Length of credit history (55 percent)
- Opening a credit account (51 percent).
The five factors that make up a FICO score, the granddaddy of credit scores, are: payment history (35 percent), amounts owed (30 percent), length of credit history (15 percent), credit mix and new credit (each 10 percent). So the students in the survey were right on the money with those responses.
However, the students also incorrectly selected the following as factors affecting credit scores:
- Being denied credit (43 percent)
- Interest rate (37 percent)
- Checking your own credit report (22 percent)
- Participating in credit counseling (14 percent)
- Payroll changes (11 percent)
- Driving record (10 percent)
- Gender (2 percent)
Some websites give a credit score and a lot more information. That’s what people need to pay attention to.
|\u2014 David Weliver|
Founding editor of Money Under 30
The study commissioned for Equifax, one of the three main credit bureaus in the United States, is based on a blind survey of more than 600 American college students and was conducted in June 2016.
Weliver says college students have much more access to free credit scores and trackers than earlier generations, but some websites “give a lot more information,” such as detailing how various actions will raise or lower a credit score.
“That’s what people need to pay attention to.”