Give yourself some credit. Actually, get yourself some credit.
Credit seems like a concern for middle-aged adults with mortgages and car payments, but it’s something students should consider as well.
It is never too early to start establishing a good credit record. There are simple, low-risk techniques for building a credit score without having a wealth of funds or financial savvy.
Elissa Torres, SF State junior, wishes she had learned the lessons of credit before it came to haunt her.
She had an epiphany when she moved to San Francisco for school and struggled to find an apartment without a credit history.
“I was realizing, ‘Crap! I don’t have any credit. I don’t know how to go about getting a loan. I don’t even know about establishing credit. How do I even do this?’” Torres said.
Stephen Huxley teaches courses in personal finance at the University of San Francisco, co-author of “Asset Dedication” and is published regularly in industry journals like “Financial Planning.” He believes it is imperative for students to be aware of their credit.
“There are many sad tales of students who are so immature that they get themselves into credit card debt without even thinking about how to pay it off,” Huxley said.
Almost anyone can walk into their bank and walk out with a card. The credit limit and interest may be poor, but the opportunity is still there. However, a credit card that never leaves your wallet is just a piece of plastic. Credit rating companies only take into account debts that have been repaid.
“The generic recommendation is for a college student to take out a card with a low limit (something like $500 if possible), charge $20 one time, then pay off the minimum each month without fail,” Huxley said. “Then do it again after the $20 is paid off. Do not use it for anything else.”
Students should view their credit card solely as a means to establish credit, not a way to buy stuff they can’t afford. Making small charges that can easily be paid off is the classic technique for establishing credit.
Gabe Albarian is the author of “Financial Swagger,” a finance guide for college students. He points to a few little tricks that can accelerate the process of establishing credit while taking away some of the risk.
Albarian advises students with financially responsible parents to become an authorized user on their accounts.
An authorized user attaches themselves to the credit activity of anyone on the account. Basically, the parents’ payments count toward their child’s credit score.
“Their responsible payments, their credit history, whatever it may be will be transferred to your credit history and give you a better credit score within months, which is wonderful,” Albarian said.
Albarian emphasized that students become an authorized user, not a co-applicant. Co-applicants carry much more liability than authorized users.
Another method to lower the potential for massive debt is a secured credit card. A secured card is similar to a regular except that it requires an up-front security deposit. The card is then issued with a spending limit equal to the amount of the deposit.
“The amount of your credit limit becomes the amount you have secured in this account,” Albarian said.
Secured cards are easier to get because the deposit protects banks. They also protect the consumer by ensuring that there is always real money to back up charges on the card.
There is consensus among experts that one of the fundamental things to understand is that having credit matters and uncontrolled spending will have real consequences.
Torres has seen these consequences for herself in the shoppers customers who come into The Gap store where she works.
“Some people, it really screws them over because they reach their limit and say ‘Oh, I can’t really pay for all this,’” Torres said.
Albarian believes students should understand their own impulses and compensate for them. He recommends that those who don’t trust themselves ask their banks for a lower credit limit as protection.
“They give you a spending balance of $5000. It automatically becomes this feeling that you have $5000 of free money to spend that you can delay the payments until later on in life,” Albarian said. “That’s not the reality of life.”
The simplest and most important method to establishing credit is to make your payments on time. It may seem basic, but missed payments are a recipe for compounding debt and a bad credit score.
“If we really know ourselves well, we know what our spending habits are like. We can really teach ourselves to budget,” Albarian said. “Make your responsible payments and make them on time.”
Torres learned the lesson and is on her way to a high score.
“I know I’m only 20 but any step to start establishing credit would be a good step,” she said.