No one wants to ruin their credit, but students who have never handled credit before find it easy to do.
Here, according to personal finance experts, are 10 ways students can ruin their credit:
1. Abusing easy credit.
Students can easily get approved for one or more credit cards, and then spend themselves into a hole by graduation — often on top of tens of thousands of dollars in student loans.
“It’s like a kid in a candy store,” says Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling, a national trade group for credit counselors. “Once the students get on campus, they’re inundated with credit card offers. I know of no other example where unemployed people are offered so much credit.” A low credit limit can be maxed out quickly on pizzas and music downloads, she says, and when students reach the limit, they apply for more credit.
College students are profitable targets because they’re more likely to get high-earning jobs down the road and become loyal credit customers. If they do fall behind, parents often absorb the heavy interest hit.
Easy credit “allows students to spend money they don’t have,” says Stephen Epstein, a financial literacy trainer at DollarCamp.com. “But you can manage temptation. You’re much less likely to buy an iPod or go on spring break if you were to pay cash, as opposed to swiping a credit card.”
2. Revolving credit.
According to a study released in August 2007 by Nellie Mae (a subsidiary of Sallie Mae, the nation’s leading student loan company) the average amount of money a graduate student puts on credit cards for all direct education costs — tuition, room and board, textbooks, school supplies, transportation — was $2,820. One of 10 students charged $7,000 or more.
Let’s look at the debt load for someone who has that $2,820 credit card debt. Let’s also assume an interest rate of 15 percent, which in May 2008 is typical for student credit cards. Let’s also say the student pays the most-typical minimum payment — 1 percent of balance, plus interest and fees.
Assuming the worst — that the former student continues to pay only the minimum — the mortarboard would be faded and dusty before the loan’s payoff: It would take 21 years to shed the debt.
3. Missing payments.
Skipping a payment is worse than paying the minimum. The interest compounds, and a “30 days late” notation shows up in your credit report. Missed payments will hang around on a credit report for seven years.
4. Paying bills late.
Even if a credit card account is paid faithfully, the issuer can opt to hike its interest rate if a cardholder has made late payments on other bills, such as car loans, utility bills and other credit cards. This is called universal default.
“Having a credit card when you’re in college is a fabulous opportunity to build a positive credit history,” says Cunningham. “Likewise, they have to understand that the opportunity exists for them to destroy their credit history and hamper their future borrowing power. The job, the apartment, the new car, the insurance: All of those pull your credit report.” If students can make that connection early on, she says, “I can’t imagine anyone intentionally digging that financial hole knowing that that’s going to be the result.”
5. Not having a budget.
Epstein, the financial literacy trainer, says students are “terrible” about budgeting and that it may be the biggest challenge they face. In his financial literacy seminars, “We talk about a budget as being the bridge between your actions and your intentions. This is as much about personal growth as it is about budgeting.” Budgets reflect spending priorities, he says.
“I don’t budget per se, but I know what I can afford and can’t afford,” says Don Stanley, a senior at the University of Texas in Austin. “When it comes down to it, if I can’t afford to buy beer on the weekend, I’m not going to, because I need to eat.”
6. Mismanaging student loan money.
A front-end lump sum expected to last an entire semester challenges students inexperienced with budgeting and tempted daily by impulse buys.
“I think a lot of students need to prioritize a little bit more. My main advice would be to prioritize what they need or what they don’t need before they go and pay $400 for an Xbox,” says Stanley, who receives loan money at the beginning of each semester and uses personal finance software to keep an eye on where it’s going.
7. Ignoring creditors.
If you you know a payment will be late, some creditors will agree to renegotiating the terms of a loan if you talk to them beforehand. When payments are missed and creditors are calling, ignoring the calls will only make matters worse.
Creditors prefer getting some money to writing it off their books and selling the debt to a collection agency. In selling the debt, the original creditor washes its hands of the account — and most likely leaves a negative mark on your credit report.
8. Opening or closing accounts frequently.
Regardless of the free T-shirts or perfume gift boxes that might come with application offers, resist the temptation to apply for a lot of credit quickly. The best way to keep a healthy credit score is to grow credit slowly.
9. Co-signing for others.
Thinking about helping a friend finance that new laptop by co-signing a credit application? Don’t. Students will face enough financial challenges without taking on others’ financial responsibilities. Co-signers are liable for any unpaid balances.
10. Not keeping tabs on credit reports.
It pays to keep tabs on your credit score, and everyone is entitled to one free credit report each year from each of the three major credit bureaus. Make sure to obtain them from the government-mandated site, http://www.annualcreditreport.com/. Be wary: Sites offering “free” credit reports require paid memberships for additional credit products.
The need to learn the lessons
“I would hope that we don’t all have to learn from the school of hard knocks,” says Cunningham. Epstein says financial literacy “needs to be a prerequisite for graduating. You should have to pass an exam before you’re allowed to get a credit card, the same way you do to get a driver’s license.”