How Not to Move Back in With Your Parents
Listener Mailbags Podcast Episodes
Student Mailbag: Building Credit
Listen to the Podcast
Pete and Alex have 3 special guests in this week’s podcast: IU students Dottie, Bri, and Brendan from the IU MoneySmarts team pay a visit to ask their questions about repaying loans, saving money, and building credit.
Read the Show Notes
If you’re in college, or if you’ve already been there, it’s really no secret that building credit – if that is something that even crosses your mind while you’re in school– is not the easiest thing to do with little income, few expenses, and minimal knowledge about how to manage your personal finances. While it may not be something that is completely relevant to your current financial situation, it will definitely affect your future finances, especially when you are trying to rent or buy a home or car, take out a private loan, or even get a new credit card. Your credit-worthiness will be of importance likely sooner rather than later. And while thinking about building credit might excite you just as much as thinking about how to save up for retirement, no matter how far away that is for you, it’s better to get a solid understanding of what that means for you now…for when it really matters.
Typically speaking, before you can lease an apartment or take out a loan, companies will run a credit check on you to find out how dependable you have been on paying your bills on time or how responsible you are with credit cards. You usually have to have credit in order to prove you are worthy of building credit. It sounds pretty ridiculous if you are in the position of trying to rent your first apartment and have never had to pay bills before to prove to your landlord that you are responsible enough to pay your rent on time. But to have a good credit, you have to have a history of credit to begin with.
At first, you will likely need someone to help you along the way to vouch for your credit history and serve as a co-signer when you need to borrow money. If you haven’t built enough of a credit history to determine your credit worthiness (a fancy way of saying whether or not you will be a dependable bill payer), companies will ask you to have a co-signer, especially if you are trying to rent an apartment. Then, both you and that person become financially responsible for whatever dotted lines you sign.
The catch is that your co-signer has to be someone who has built up enough credit history and has good enough credit to be worthy of being a co-signer. In many cases, a roommate is likely to be in the same boat as you. It may turn out that your parents might are the better option. Listen to Pete’s advice about involving your parents when it comes to co-signing. Think of ways that might benefit both your credit history and your independence.
As far as your credit history, stay focused on what goes onto your credit report rather than your credit score, because the report is what will matter most in terms of determining your credit-worthiness. Think of it like this: Grades for your classes are nothing without the work that goes into them. It’s the little things that build your final grade that matter, like turning your homework in on time and studying to get better grades on your tests and quizzes. The same goes for your credit report, because paying your bills on time and staying on top of your debt levels and are what determine your score.
Maybe start small: If you live with your parents, are you able to put any bills in your name? Maybe open a savings account or a checking account where you can deposit your paychecks. Look into secured credit cards to see if those are the right option for you instead. It all adds up and will help you in building credit early.
The biggest tip when it comes to taking out student loans: Don’t take out more than you need. Know what your options are and where you need the supplemental funds before you sign off on any amount, because you will have to pay them back in the long run…with interest. The good news is that paying back your loans will help you build credit.
While it may be a challenge to start building credit when it means having already established credit, keep in mind that student loans can be more of a help than a hindrance. Once your loans go into repayment, making your payments on time and staying on a payment plan that works best for you are going to help your credit.
Additionally, many students don’t know that loans, while they may be earning interest while you’re in school, don’t actually go into full repayment until you graduate. It’s important to learn about grace periods – which is the amount of time between your graduate date and when you have to pay your first bill – and how repayment plans work to best understand what your timeline will look like and how you can make paying your loans back a manageable endeavor.
Here’s the basic interest information you will need to know when it comes to paying back your student loans. These numbers only apply if your loans are from the federal government. Interest rates on bank and other private loans will vary.
|Interest Rates for Direct Loans First Disbursed on or After July 1, 2013*|
|Loan Type||Borrower Type||Loans first disbursed on or after 7/1/13 and before 7/1/14||Loans first disbursed on or after 7/1/14 and before 7/1/15|
|Direct Subsidized Loans||Undergraduate||3.86%||4.66%|
|Direct Unsubsidized Loans||Undergraduate||3.86%||4.66%|
|Direct Unsubsidized Loans||Graduate or Professional||5.41%||6.21%|
|Direct PLUS Loans||Parents and Graduate or Professional Students||6.41%||7.21%|
All interest rates shown in the chart above are fixed rates for the life of the loan.
If you are receiving financial aid, make sure to keep in contact with your financial aid office to make sure you understand your aid package.
Saving during Loan Repayment
No doubt about it – this can be tricky. But if you have a good understanding of how loan repayment works, it might make the whole concept of “saving while paying” a bit easier to swallow.
A few terms that will help you along the way*:
Repayment Plans: You do have options. Repayment plans determine how much in payments you make each month toward your loans and how long it will take you to pay them off entirely. They are designed to fit your financial situation and help making your payback schedule easier based on your income.
Loan Consolidation: The federal government does in fact allow you to combine multiple loans into one if you need help managing making several payments.
Deferment, Forbearance, Forgiveness, Cancellation and Discharge: You can’t be expected to do it all. These are all terms that serve as options or circumstances when you might be able to delay or stop payments when you might need it most. It's good to know what these terms mean, but be on alert if you fall within any of these categories.
Default: This is what can happen if you don’t keep up with payments. And while this is not the place you want to be, again, you have options. If you default on your loans, you can always contact your loan servicer to develop a more manageable repayment plan for you.
Knowing that you have options when it comes to staying on track with paying back your loans might help you rest easier. And it’s important to know that your loan payments should be the first thing to come out of your check. So, when you think about it, if saving is just as important for you as making your payments, it makes just as much sense to deduct the money from your paycheck when you first get it. It may not be easy at first, but it’s a good habit to get into right when you get paid. This might mean opening a separate savings account or withdrawing the money immediately after every pay period to store away. At least that way, each time you get paid, the money is already gone before you even think about spending for the week or that month.
We Can Help
Now that you have some of the language to start talking about concerns that many students have around credit and savings, feel free to ask us more questions. Contact us at email@example.com to set up a one-on-one appointment with a MoneySmarts team member, and ask more questions as you start planning for your financial future.
*These charts, terms, and definitions are from studentaid.ed.gov – a great site to help you learn more about how federal financial aid programs work.