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Establishing Good Credit in College

Establishing Good Credit in College

Good credit may open doors. It is vital to securing a loan, a business loan, or buying a home. When you establish and maintain good credit in college, you create a financial profile for yourself that can influence lenders, landlords, and potential employers.

Unfortunately, some college students do not have good credit. In fact, Credit Karma says that the average 18-to-24-year-old has a credit score of 630. A FICO score of 730 or higher is considered good.[i]

What are the steps toward a good credit score? To start, you need to utilize credit. About 15% of your credit score is built on the length of your credit history, so the sooner you purchase goods and services with a credit card and pay off that debt, the sooner you create a record of credit use.1

Aim to reduce the balance to $0 every month. Does this sound like a challenge? It may not be if you just use a credit card to purchase everyday things. When you start splurging with a credit card, paying off the balance in full can become a problem.1

Pay your credit card bill on time. Roughly 35% of your credit history develops from your pattern of payments: how on time they are, how late they are. One approach to consider is scheduling automated payments from your bank account, schedule reminders, or just try to pay the bill as soon as it arrives.1

Refrain from applying for 2-3 credit cards at once. About 10% of your credit score reflects your history of credit inquiries, so if you suddenly apply for another 2-3 cards, you could hurt your score.1

Another potentially bad move is jumping from card issuer to card issuer – that is, getting a card, then closing that credit card account and opening a new one after a few months because you find another credit card with better perks. In doing this, you end up giving yourself a shorter credit history per credit card account.1

What if you have problems getting a traditional card? If you have no income, you might run into this – or, there might be other reasons that make it hard for you to qualify for one. If this is the case, consider going to the bank or credit union where you have a savings account and applying for a secured credit card. With these types of cards, you transfer some money into an account linked to the use of the card, and that amount represents your credit card limit. You can also ask to become an authorized user on a credit card held by one or both of your parents.1

You can potentially help your credit score in other ways. Consistent bill paying is a plus for your credit history. If you do become an authorized user on a parent’s credit card and they use credit responsibility, just being linked to that account history could help your credit rating. If you are living off campus, you might end up co-signing a lease so make certain you understand you and your roommates’ financial obligations. Financially negligent ones could hurt your credit rating if, for example, you are sharing utilities costs. With financially trustworthy roommates, you may avoid that kind of credit score damage. Lastly, if you move while in college, be vigilant about having your bills forwarded to you, to avoid missing payments.1

To learn more about CapSouth Wealth Management and the services we provide, call our office at 800.929.1001 or visit our website at www.capsouthwm.com

Investment advisory services are offered through CapSouth Partners, Inc., dba CapSouth Wealth Management, an independent registered Investment Advisory firm. Information provided by sources deemed to be reliable.  CapSouth does not guarantee the accuracy or completeness of the information.  This material has been prepared for planning purposes only and is not intended as specific tax or legal advice.  Tax and legal laws are often complex and frequently change.  Please consult your tax or legal advisor to discuss your specific situation before making any decisions that may have tax or legal consequences.

This article contains external links to third party content (content hosted on sites unaffiliated with CapSouth Partners). The policies and procedures governing these third-party sites may differ from those effective on the CapSouth company website, as outlined in these Disclaimers. As such, CapSouth makes no representations whatsoever regarding any third-party content/sites that may be accessible directly or indirectly from the CapSouth website. Linking to these third-party sites in no way implies an endorsement or affiliation of any kind between CapSouth and any third party, including legal authorization to use any trademark, trade name, logo, or copyrighted materials belonging to either entity.

[i] https://thesimpledollar.com/how-to-build-good-credit-in-college/

Coping with College Loans

Total student loan debt in America is now around $1.6 trillion. Since 2008, it has more than doubled. Federal Reserve data states that 44.7 million Americans are dealing with lingering education loans. The average indebted college graduate leaves campus owing nearly $30,000, and the mean monthly student loan payment is about $400.[i]

Student debt influences home buying and retirement saving decisions. The National Association of Realtors says that 25% of recent homebuyers have outstanding student loans, including 41% of first-time buyers. A 2018 study by the Center for Retirement Research at Boston College concluded that under-30 employees carrying education debt typically have just half as much saved in their workplace retirement plan accounts as other workers their age.[ii],[iii]

If you carry a sizable education debt, how can you plan to pay it off? If you are young (or not so young), budgeting is key. Even if you get a second job, a promotion, or an inheritance, you won’t be able to erase any debt if your expenses consistently exceed your income. Smartphone apps and other online budget tools can help you live within your budget day to day or even at the point of purchase for goods and services.

After that first step, you can use a few different strategies to whittle away at college loans.

*The local economy permitting, a couple can live on one salary and use the wages of the other earner to pay off the loan balance(s).

*You could use your tax refund to attack the debt.

*You can hold off on a major purchase or two.

*You can sell something of significant value – a car or truck, a motorbike, jewelry, collectibles – and use the cash for paying down the debt.  

Now, in the big picture of your budget, you could try the “snowball method” where you focus on paying off your smallest debt first, then the next smallest, etc., on to the largest. Or, you could try the “debt ladder” tactic, where you attack the debt(s) with the highest interest rate(s) to start. That may permit you to gradually devote more and more money toward the goal of wiping out that existing student loan balance.

Even just paying more than the minimum each month on your loan has the potential to help. Making payments every two weeks rather than every month can also have a positive impact.

If a lender presents you with a choice of repayment plans, weigh the one you currently use against the others; the others might be better. Signing up for automatic payments can help too. You avoid the risk of penalty for late payment, and student loan issuers commonly reward the move by lowering the interest rate on a loan by a quarter point.[iv]

What if you have multiple outstanding college loans? If one of them has a variable interest rate, try addressing that one first. Why? The interest rate on it may rise with time.

Another option is combining multiple federal student loan balances into one. While this requires a consolidation fee, it also leaves you with one payment, perhaps at a lower interest rate than some of the old loans had. If you have multiple private-sector loans, refinancing is an option. Refinancing could lower the interest rate and trim the monthly payment. The downside is that you may end up with variable interest rates.[v]

Maybe your boss could help you pay down the loan. Some companies are doing just that for their workers, simply to be competitive today. According to the Society for Human Resource Management, 8% of employers offer this perk. A 2018 Employee Benefit Research Institute poll of 250 firms revealed that 13% planned to offer such assistance in the future.[vi]

To reduce your student debt, live within your means and use your financial creativity. It may disappear faster than you think.

To speak to a CapSouth advisor about student loan debt, contact our office at 800.929.1001 or visit our website: www.capsouthwm.com

Investment advisory services are offered through CapSouth Partners, Inc., dba CapSouth Wealth Management, an independent registered Investment Advisory firm. Information provided by sources deemed to be reliable.  CapSouth does not guarantee the accuracy or completeness of the information.  This material has been prepared for planning purposes only and is not intended as specific tax or legal advice.  Tax and legal laws are often complex and frequently change.  Please consult your tax or legal advisor to discuss your specific situation before making any decisions that may have tax or legal consequences.

This article contains external links to third party content (content hosted on sites unaffiliated with CapSouth Partners). The policies and procedures governing these third-party sites may differ from those effective on the CapSouth company website, as outlined in these Disclaimers. As such, CapSouth makes no representations whatsoever regarding any third-party content/sites that may be accessible directly or indirectly from the CapSouth website. Linking to these third-party sites in no way implies an endorsement or affiliation of any kind between CapSouth and any third party, including legal authorization to use any trademark, trade name, logo, or copyrighted materials belonging to either entity.

[i] https://www.fool.com/the-ascent/research/student-loan-debt-statistics/

[ii] https://www.nar.realtor/student-loan-debt

[iii] https://www.washingtonpost.com/business/2019/06/25/heres-what-trillion-student-loan-debt-is-doing-us-economy/

[iv] https://www.nerdwallet.com/article/loans/student-loans/how-to-lower-student-loan-interest-rate

[v] https://www.nerdwallet.com/blog/loans/student-loans/consolidate-student-loans-2/

[vi] https://www.wsj.com/articles/employers-try-a-new-perk-matching-student-loan-payments-with-401-k-contributions-11570708801

Ways to Improve Your Credit Score

A good credit score can result in a lower home mortgage rate or a car buying rate. We all try to maintain one. Sometimes, though, life throws us a financial curveball and that score declines. What steps can we take to repair it?

Reduce your credit utilization ratio. Your credit utilization ratio (CUR) is the percentage of a credit card’s debt limit you have used. Simply stated, if you have a credit card with a limit of $1,500 and you have a current balance of $1,300, the CUR for that card is 87%. Carrying lower balances on your credit cards may tilt the CUR in your favor and promote a better credit score.[i]

Review your credit reports for errors. You are entitled to receive one free credit report per year from each of the three major U.S. credit reporting agencies – Equifax, Experian, and TransUnion. You can request a report from all three at once. As the federal government’s Consumer Financial Protection Bureau notes, you can do this at annualcreditreport.com. About 20% of credit reports contain mistakes. Upon review, some borrowers spot credit card fraud; some notice botched account details or identity errors. At its website, the CFPB offers sample letters and instructions you can use to dispute errors.[ii]

Behavior makes a difference. Credit card issuers, lenders, and credit agencies believe that payment history paints a reliable picture of future borrower behavior. Whether you pay off your balance in full, whether you routinely max out your account each month, the age of your account – these are also factors affecting that portrait.[iii]

Think about getting another credit card. Your CUR is calculated across all your credit card accounts, in respect to your total monthly borrowing limit. So, if you have a $1,200 balance on a card with a $1,500 monthly limit and you open two more credit card accounts with $1,500 monthly limits, you will markedly lower your CUR in the process. There are potential downsides to this move – your credit card accounts will have lower average longevity, and the issuer of the new card will, of course, look at your credit history.1

Think twice about closing out credit cards. When you realize that your CUR takes all the credit cards you have into account, you see why this may end up being a bad move. For example, assume you have $5,000 in consumer debt among five credit cards and that each card has a $2000 limit. You have $10,000 in available credit. If you close two cards, you now only have $6,000 in available credit. In terms of CUR, you are now using 83% of your available credit card balance whereas before you were using 50%.[iv]

Beyond that, 15% of your credit score is based on the length of your credit history – how long your accounts have been open and the pattern of use and payments per account. This represents another downside to closing out older, little-used credit cards.3

Alternative credit scoring systems have also emerged. If your credit history has taken a big hit or is spotty, they may end up helping you out. TransUnion’s CreditVision Link, the LexisNexis Risk View Score, and the FICO XD2 and UltraFICO scores compiled by Fair Isaac Co. (FICO) are examples. They introduced new scoring criteria for borrowers who may be creditworthy but lack sufficient credit history to build a traditional credit score or need to rebuild their scores. Cell phone payments, cable TV payments, property records, and other types of data are used by these systems in order to set a credit score.[v]

To discuss ways to improve your credit score, call CapSouth to schedule an appointment with one of our advisors. 800.929.1001. Visit our website to learn more about CapSouth and the services we provide. www.capsouthwm.com

Investment advisory services are offered through CapSouth Partners, Inc., dba CapSouth Wealth Management, an independent registered Investment Advisory firm. Information provided by sources deemed to be reliable.  CapSouth does not guarantee the accuracy or completeness of the information.  This material has been prepared for planning purposes only and is not intended as specific tax or legal advice.  Tax and legal laws are often complex and frequently change.  Please consult your tax or legal advisor to discuss your specific situation before making any decisions that may have tax or legal consequences.

This article contains external links to third party content (content hosted on sites unaffiliated with CapSouth Partners). The policies and procedures governing these third-party sites may differ from those effective on the CapSouth company website, as outlined in these Disclaimers. As such, CapSouth makes no representations whatsoever regarding any third-party content/sites that may be accessible directly or indirectly from the CapSouth website. Linking to these third-party sites in no way implies an endorsement or affiliation of any kind between CapSouth and any third party, including legal authorization to use any trademark, trade name, logo, or copyrighted materials belonging to either entity.

[i] https://www.nerdwallet.com/blog/finance/credit-utilization-improving-winning/

[ii] https://www.consumerfinance.gov/about-us/blog/common-errors-credit-report-and-how-get-them-fixed/

[iii] https://www.cnbc.com/select/what-is-a-credit-score-and-how-to-check-yours-for-free/

[iv] https://www.fool.com/the-ascent/credit-cards/articles/dont-close-that-credit-card-without-asking-yourself-these-6-questions/

[v] https://www.creditcardinsider.com/blog/check-free-fico-score-every-other-free-credit-score/

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