As graduating students accept their diplomas in four weeks, some might be thinking only of newfound free time. Others of how and when they’ll catch up with friends. But looming over most of their graduation caps could be concerns of finding a job, buying a car and a house, and even starting a family.
A three-digit number, your credit score, can make it difficult and expensive to move on to that next phase in life. In this post-bailout economy, banks, insurers, employers, landlords, and utility companies are looking at your credit score more closely than ever, so it is essential to know what the score means and how you can take control of it.
Taylor Jones, a senior in engineering, said he recently got into a car accident and hopes to buy a car before graduation.
“I haven’t checked my credit score though,” he said. “I’m not sure how it will effect what kind of car I’m able to buy.”
Every time a person bounces a check, pays a bill late or maxes out a credit card, a credit-reporting agency records the transaction. This information is compiled for every person to generate a three-digit score that banks use to determine whether a person is a good credit risk or a bad credit risk.
The most frightening thing, according to personal finance lecturer David Carter, is that companies are using credit scores to see how good of an employee an applicant will be. These companies claim that studies show people with low credit scores get sick more often and take more sick leave than those with higher credit scores.
Companies are looking to decrease healthcare costs, he said, so they are more likely to hire the person with a higher credit score because of the supposed correlation with health and work output.
A perfect credit score is an 850, but a score of more than 680 is considered a good score. The higher the score, the more likely people will be able to get credit cards or loans with lower interest rates, but to establish credit they have to prove their ability to repay.
To begin establishing credit worthiness, Carter recommends that a student gets one credit card and tells the bank to put a $500 limit on it that it will not increase without the student’s permission. Carter tells his students to use credit cards for small necessities like groceries and gas and for emergencies, but he warns his students to record these purchases so they can repay balances in full each month.
“I know my credit score is low from not using any credit,” Eric Flynn, a junior in engineering, said. “I need to get a credit card, but it takes forever to get credit on it, and I wouldn’t use it enough.”
Ideally, when a person chooses a credit card, it should be one with no application fee and a low annual fee, according to “9 Ways to Build Credit from Scratch” on MSN Money, a Web site that provides financial advice for families.
The card should also be reported to all three credit bureaus because properly using a card won’t help a person’s credit score if it isn’t reported. Specific store cards, like a Belk’s card or a gas card, can also help you begin establishing credit, MSN Money stated.
The fastest way to get a credit history is to “piggyback” on someone else’s credit, according to MSN Money. A person with low or no credit can be added to a credit card as a joint account holder or have a parent cosign a loan.
If the cosigner has a good credit score, interest rates will be low, but if the cardholder is late making a payment or misses a payment, it will negatively affect both signers’ credit scores.
Paying utility bills on time, having a low balance on credit cards and having a checking and savings account are also ways to build credit. Everyone is allowed one free credit report check annually, according to MSN Money, so it is a good idea to see where you rank and to make sure no one has stolen your identity.
If a person’s credit score is on the low side, there are many ways to improve it.
The key, Carter said, is to be proactive and to communicate. Carter recommends students sit down with their bankers and ask for help.
He suggests consolidating all debt onto a single credit card with a low interest rate and making payments on it each month. When cardholders sit down and talk with their bankers, credit reports show that they took a proactive approach. When cardholders pay off debt, their credit score goes up.
“Banks know that 20-year-olds make mistakes,” Carter said. “They want you to succeed.”
He said Clark Howard, a radio talk show host who gives consumer tips, suggests that if you have more than one credit card, you should put them in a bucket full of water and literally freeze them. Canceling the cards will look bad on your credit score, but you have to make sure you do not have access to them.
Credit repair programs are another option, but, according to Carter, they cost money and are intended for people who are in severe debt and are “too lazy to get off their butt and do something.”
Carter also recommends that students set up their budgets on Excel spread sheets and list all monthly expenditures and as well as their monthly incomes, so they can save.
If students start building or repairing their credit scores today, Carter said, they will save hundreds of thousands of dollars in interest fees that they won’t have to pay.
“There is no money to borrow right now,” Carter said. “But if I went out to borrow money tomorrow, I could do it. It is all about being disciplined and living frugally.”
