How Not to Move Back in With Your Parents

Financial Literacy 101 Podcast Episodes

Building and Establishing Credit
Credit

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Pete and Alex are joined by Phil Schuman, IU's Director of Financial Literacy, to talk about some tips you can use to help build a solid credit foundation.



Read the Show Notes

Have you seen all the news these days about credit scores? For some college students, a credit score can be a major concern; for others, they could care less. You may not even have a credit score, yet, if you haven’t had to make any purchases on a payment plan.

There are two types of credit scores, FICO and Vantages. FICO (Fair Isaac Corp.) is the most well-known with a score range of 300 to 850. Anything below 620 is not good. Yet, the average score for age 18-29 is only 637. Why? It takes time to develop a good score. The principal factor in credit scores is payment history. Maybe you have had a credit card for a year and have made timely payments, but in the grand scheme of things, a 1-2 year credit history isn’t really that much. So if payment history is the principal part of a credit score, how much is it worth? What are the other factors?

FACTORS IN CREDIT SCORES
  • Payment History 35%
  • Amounts Owed 30%
  • Length of Credit History 15%
  • Types of Credit in Use 10%
  • New Credit 10%

For a long time, credit scores have had an aura of mystery because individuals did not know how to access their credit report. With the establishment of the Bureau of Consumer Financial Protection in 2010, there is now information readily available to guide consumers.

http://www.consumerfinance.gov/the-bureau/

There are three credit agencies: Experian, Transunion, and Equifax. You are entitled to one free credit report per year. What a credit report will tell you are the surprising things that you had no idea were reported. Remember the time you and your best friend were window shopping for new cars without ever intending to purchase and at each dealer you filled out a credit application to look legitimate? Well, that counted against you because your credit score is affected every time an account inquiry is made. So be careful! Only have other people pull your credit score if you are serious about making a purchase that requires one.

The free credit report will not have your score. Want a score…pay a fee (at least $10). However, while your credit score is a nice thing to know, your primary concern should be making sure your credit report (i.e., the report that includes everything that goes into your credit score) is accurate. The benefits of viewing your credit report is learning about what should not be present. Many individuals first find out they have been the victim of identity theft when they see strange entries on the report. Notifications from collection agencies, credit denials from companies from which you have made no purchases, or a denied charge on a credit card that is in good standing are all things that could be on there. Take action if you see these types of things. In order to get your free credit report to make sure that nothing strange is happening, go to http://www.annualcreditreport.com to take a look. If you have any problems with what’s on there, contact the corresponding credit agency immediately.

When viewing your credit report, always correct errors; even the mundane information where there’s no possible way they could make a mistake, like current and past addresses. If you missed paying a bill, because of moving, the delinquent payment stays on your credit report for up to 7 years. And if they don’t know your address, you’re never going to know of the mistake!

Under the Fair Credit Reporting Act, the credit agency and the company reporting in accurate information must make corrective action (which you document) and report back to you in 30 days.

If you’re concerned about establishing good credit, we’ve managed to find some tips for you. Take a careful look at them below and follow them. Remember, it takes an extended time period to develop a good credit score…for now, just make certain that your credit report is accurate and that you do what you can to not slip up; pay your bills on time so that your score doesn’t go backwards. And as always, if you need some advice/help, set up an appointment with a Peer Educator or contact us at mnysmrt@iu.edu.

Establishing Good Credit (while in college):
  1. Pay bills on time
  2. Consider a single credit card if you have none (preferably a secured or restricted card)
  3. Stay current on all credit cards
  4. Always pay down debt
  5. Avoid closing unused accounts
  6. Secure your credit report and correct errors
  7. Don’t fill out credit applications unnecessarily
  8. Know your roommate(s) financial habits* (see below)

*Pratt & Weitzel, et. al. suggest 5 C’s tell the story of individual creditworthiness.

Character—willingness to pay bills on time; no room for tardiness

Capacity—ability to pay; debt to income ratio isn’t just a textbook term

Capital-- assets…the degree you are working on is an asset

Collateral—while in college Moms & Dads generally represent collateral

Conditions—current economic factors are always a variable