Building credit

How to build credit the right way

There’s a right way and a wrong way to build credit. Let us show you the right way.

Podcast transcript

JASMIN: MoneySmarts U is brought to you by IU MoneySmarts.

PHIL: Arguably, the most important years of your financial life are your college years, the decisions you make in college can make or break your first few years in the workforce. This is exactly why you need to be money smart, enter MoneySmarts. Indiana University’s financial literacy program for students. To begin, it’s free! Now that makes financial sense. At moneysmarts.iu.edu, you can learn how to budget, how to deal with your credit, living expenses, and student loans. You can learn how to leverage summer earnings to help you reduce your student loans. Indiana University MoneySmarts, creating a financially smart culture one student at a time. Visit us online at moneysmarts.iu.edu to learn great ways to maximize your money and wreck your debt.

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PETE: Alright, Alex, we’re trying some different this week on MoneySmarts U. What are we doing?

ALEX: Yeah, we’re gonna change it up a little bit. We’re going to talk specifically a lot about what students who are listening to this show can do in their daily life to actually implement the things that we’re talking about with students. So, we’re gonna talk about things like campus resources, where can you actually go on campus to get help. Success stories in college and things we’ve seen so far where students have done a great job. Questions that the IU Office of Financial Literacy is getting specifically. And for that reason we’ve brought in the Director of Financial Literacy at IU, Phil Shuman, back for another season.

PHIL: I’m here.

PETE: Phil the Shoe Shuman joins us back again on MoneySmart U. You’ve gotta be exited.

PHIL: This is fantastic, it’s been awhile since I’ve been able to be on the mic and have everybody hear my glowing voice, right?

PETE: Absolutely. Yeah.

ALEX: We’re really excited because we can specifically to talk about some of the things that you guys are seeing in the trenches on a day to day basis. At schools with what students are struggling with and things that they’re doing well and not well. Just to start off I guess, a great way to get this conversation going would be to talk about, specifically this year, we’re in the beginning of the school year for students. The first couple of months are coming in, the first round of exams is gonna be happening. What have you seen so far from students coming into the office? The questions you’re getting, things you’ve seen in your events. What are people focusing on a lot this year?

PHIL: A lot of times it’s just students coming in asking us questions about how to more or less find their footing when it comes to their finances in college. Just because this is the first time a lot of kids, they’re first year students. It’s the first time they’re being on their own and they have to navigate the financial world, which is incredibly complicated. And so it’s kind of a little nerve-racking for these students. Because they’re coming in, they’re trying to figure out what it is taking exactly to make sure that they’re not making a misstep with their finances.

PETE: Are those students that typically have student loans that are freaked out by that? Or are you seeing people, even without student loans, come in and say, I feel like I should know some stuff, Phil? What do I need to know?

PHIL: I think it’s usually those that have student loans that come to us first. But then when we do the presentations, we do one-on-one appointments, things like that, word of mouth kind of spreads at that point. And we get the other students that don’t necessarily have loans. So what we see in a lot of cases, I will say that I think the number one thing that students need to be concerned about right now is just building credit while they’re in school.

PETE: Yeah it’s weird to me. I guess I get it, because I live in the same media world they live in. And I hear things that they’re exposed to. I just, as an expert in this category, I find that it’s unnecessary for them to worry about building credit right now.

PHIL: Yeah and I agree, and I think we take a page out of your playbook and just tell people your goal with credit in life is to not need it.

PETE: Yeah, and Alex I guess, you’re the freshest out of this and now in your first year in the work force you’re experiencing this. Did you care about establishing credit in college?

ALEX: I was more worried about falling behind than anything. And it’s been weird because I have, I would say, I’m in good standing when you look at credit score charts. I’m in the good phase right now. But the only reason that is, is because my student loans are in good standing. So it’s like I have, you know we’ve talked about tens of thousands of dollars in student loan debt, so I have a good credit score. Because I’m in good standing and I’m in my greatest period right now, been making payment, everything’s good. But it’s only because I have debt that I am better on that scale.

PETE: See Alex, obviously that you’re doing it perfect, right? Phil, that drives me nuts that people don’t realize the student loans themselves are what’s going to help establish that credit. Right?

PHIL: Yeah, but I mean it’s exactly right. But the problem is that student loans aren’t necessarily marketed to students. Students know they need them but they’re not marketed to them. Credit cards are marketed to them and so they become the things that students wanna have. Because apparently, that’s what they’ve been told, is gonna get them a better credit score.

PETE: How have I never actually considered that? I’ve never considered that you take student loans on reluctantly, and don’t want them. But you feel as though you wanna take on a credit card, because you are recruited, if you will, into that. It’s lIke someone’s hitting on you, and you like the feeling, and you wanna be a part of it. I never thought of that.

PHIL: Well I mean, the credit card buys you a lifestyle, or it can buy you a lifestyle. So that’s what gets pushed out to students, because that’s what’s attractive to them.

ALEX: Yeah, and it was a really weird experience for me, because it was me not wanting to fall behind. You say your whole goal with credit is to not need it, but that is, I would say, close to impossible to really drill into a student’s head just by saying that. Because for us it’s, well, I’m gonna buy a house and there’s a 99% chance I’m not gonna be able to pay cash for the house. I’m gonna need credit someday.

PETE: Yeah.

ALEX: So no matter what, I think I was worried about that. And I think students are still in the gears of I’m going to need it no matter what. I want to be in good standing. Because they hear the good effects of good credit and all of that.

PETE: So, Alex, I mean, this is a good example. You graduated from college with student loans, tens of thousands of college student loans. And I would say, and I’m not a loan underwriter, but Phil, I would look at Alex’s situation. And I would say a year after graduation for him, based on his income, how much he’s paid back student loans. And what his credit score will be because he paid back student loans, he could be in a position to buy a house. He shouldn’t, but he could be.

PHIL: Yep. Yeah, without a doubt, I would say.

ALEX: Just to get approved based on the credit score number, and however.

PETE: And income, and your payment history is the important part. So paying your bills on time is 35% of your credit score. And so, just pay your students loans on time. And I think Alex, one of your learnings post graduation has been how student loan interest rate works and help us feel that out. Because going into graduation, you didn’t know how it worked.

ALEX: Yeah it’s been fascinating because I am getting closer to finishing my six month grace period right now, after graduation where you don’t have to make a payment, And that’s usually meant for students to kind of get a grip and get their bearings after graduation, maybe if they don’t have a job or what ever. But for me, the interesting thing is with the types of loan that I have, the federal unsubsidized. Which are the most student loans that I took out are those, they are still acquiring interest during that grace period, And I’ve realized by giving a call to my loan provider, that if I can pay all of that interest off before my grace period ends, then that will not capitalize and increase my balance. So, basically, during you grace period, if you start off fast and you’re paying off a lot, it can save you thousands of dollars in the long run just to make small payments if you’re getting after it quickly.

PETE: And Phil, you have the exposure to the students here. Do they know this? That seems like an esoteric thing.

PHIL: I would say they don’t know it, cuz it’s not talked about at all. The grace period is what’s always mentioned. Because it comes across again as another marketing tool. Where the student loan providers are more or less doing you a favor by giving you those six months where you don’t have to make a payment. But that six months where you could make a mistake with your finances to the point where you are gonna be scrambling afterwards. Because, I think we’ve talked about it before in the past. Where during those six months, if you start living a lifestyle that you can’t afford, once you have to start paying back your loans. Then all of a sudden you’re gonna have to figure out what is that you are gonna do and where you’re gonna cut back in order to be able to afford your student loans.

ALEX: Yeah, and it’s been an interesting process because it’s also demoralizing. I’ve already put in a couple grand against it. I’ve been very aggressive. But then you still see the interest pop up there cuz it still is accruing as I pay it off. So the mental side of paying off student loans has been really interesting to dive into that from my end.

PETE: So and let’s be clear here, you paid off the interest from your student loans, but you have yet to actually tackle the principal.

ALEX: Yeah, so I’ve been focusing, and that’s something I’ve been wondering about. Because I have been tackling the interest, which is not totally gone yet from everything that’s added up. But if I keep going in the rate I am, I will be able to pay off all the interest that has accrued so far before my grace period ends. But it’s weird, because I’m wondering, I have a subsidized loan that hasn’t been accruing. My mental game is should I pay that off, because there is interest accruing anyway no matter what? So it’s been a weird experience to go through that. From my point of view, I’m trying to get rid of all the interest first. And then I’ll simply tackle the balance that I have with the highest interest rate from there. Because that adds up quicker than the others during the grace period. That’s how I’m attacking it right now for that, but man, it’s a mind game for sure.

PETE: Yeah, and Phil, are you talking to a lot of students post graduation? You have a lot of contact with students, obviously in the undergrad level, and some graduate students probably even as well. But how about once they’re gone, what’s the Department of Financial Literacy, is it kind of the birds fly out of the nest and you’re like goodbye, or what happens?

PHIL: We’ve been trying to strike up a conversation with our alumni association to get in touch with those students, or well, I guess at that point, alumni. And that’s a relationship we’ve been forging. And I think it’s gonna culminate with doing a session for those alumni here in the next couple months. Because it is important, we don’t wanna just send them on their merry way after they graduate and hope that they’ve learn everything they need to know. We wanna have some checkpoints for them and make sure that they’re doing okay and help them prepare for the next steps in their lives.

ALEX: Yeah, most of my friends are pretty broke right now? [LAUGH] Yeah, I have very few friends who don’t have jobs still. But even the ones who have jobs are, I’ve been chatting with them like yeah, I have no money.

PETE: And then you had to sacrifice because you have taken this hard stance on your student loans. There are things you are delaying the purchase of.

ALEX: Totally, and I’m even to the point where I’m so aggressive that it lowers drastically the amount of money where I can just kind of have fun. And so I’m in the battle right now of, if I’m really aggressive and wanna pay off my loans by the time I turn 26. Well that next 3 years, it’s do I really wanna live my life not pretty much doing anything fun from the 22 to 26 years, which is where a lot of people are having the most fun? So, it’s definitely a battle of lifestyle versus wanting just to be debt-free that I’ve struggled with.

PETE: Yeah, Phil, that’s why when I hear you say that people are so worried about building credit, that seems like such a distraction. And it’s so not the point of what we’re trying to do. I think ultimately what I love about IU’s Department of Financial Literacy is that it’s about helping students move their net worth forward and not their credit score forward.

PHIL: Yeah, our thought is that if you’re making the right financial decisions as it is, we try not to talk about credit or really focus on it a whole lot. But if you’re making the right financial decisions for yourself, then the credit’s just gonna take care of itself, and you shouldn’t worry about it. We always talk about credit score, it’s a game more or less where you’re just trying to achieve the highest score. But honestly, it’s everything you’re gonna do to get that score that’s really important.

PETE: And by the way, in your department, you’ve had to make the decision, re we going to really. How many students graduate from IU a year, of all of IU schools? I have no idea how many graduate. But yeah, gotta be over 10,000 right? Cuz it’s a little under 10,000 just for main campus. I would think so. All I can tell you is the number of students across all the campuses is 115,000. Yeah so let’s see. Otherwise, we’re seeing 115,000 students and we’re preparing them to be life long borrowers with great credit scores. And that just, it’s not in the spirit of what you’re trying to accomplish. You’re helping people make their education decision better by making it lower cost, by not letting interest drag it down the road. And Alex you’re a good example of that.

ALEX: We’ve talked about this before, about how we’ve tried to take the point of view too of looking forward for students. If you make these wrong decisions now, granted, you can make a few mistakes, you’re going to. But if you make the drastic mistakes now that are avoidable, there are things later in life you’re going to want to do that you cannot because you made these mistakes.

PHIL: And I think that’s the most important thing. And one of the things we really like about talking to you is that you seem to have to focus on the long term as oppose the short term. And that’s where a lot of people seem to make the mistakes is they’ve focus on the instinct gratification of life. And they sacrifice what they’re trying to do with their lives in the long term in order to make that happen. And actually had a conversation with somebody the other day that was talking about that our brains are actually wired for a short term. So what you have to do is you have to trick your brain and focus on a long term goal but you have to break it up into short term installment in order to make it work.

PETE: Yeah and by the way people in the 30s and 40s and 50s and 60s, make the same mistakes that you’re talking about. But when you make the mistake in your early 20s you don’t have any margin for error. You have whatever the opposite of margin for error is, because you got no money. Yeah. So this is interesting for me as switching gears a little bit. You say that one of the biggest things you’ve seen is establishing the long term goal that students can move toward.

ALEX: So for people you’ve seen who have had success who’ve come to your office and you know who have made changes or done a good job. Is that long term goal something as that’s kind of been a commonality between those students? Or are there any commonalities whether it’s from their perspective their habits, who they are that you’ve seen in the success stories that you’ve had?

PHIL: It’s funny, because it’s a really simple answer to this. The simple answer to this is that the students are, they’re engaged. It’s students that want to ask questions about their finances. It’s those that don’t avoid it. Because I think that’s the biggest thing. In a lot of cases, the students are getting themselves into trouble afterwards are just, they’re not asking the questions. They’re not engaging in the material, because really finances is a complicated world. But it doesn’t have to be complicated so long as you’re keeping yourself up to speed.

ALEX: Totally, so just to wrap up here, at the very end. Really quick for people who are on campuses of different types, whether it’s community colleges, main campuses. What are the best places they can go to for resources or guidance to be able to make the changes that they might hear about on this podcast?

PHIL: So in a lot of cases it’s gonna be pretty scattered. So you always wanna talk with financial aid, figure out what it is you can do in the front, scholarships or just more loans if you need them. Just find out what the best situation is for you. Talk to career services as much as you possibly can. Figure out what is it you can do so that you’re putting yourself in a better situation to get the job you need after you graduate. And then also talk with whatever your specific school, department, whatever it is, wherever you’re making, talk with them. Figure out what it is you can do to better prepare yourself for your major, how you can be involved to boost your resume. And then also think about whether or not they have additional scholarships as well that can help you fund your college.

ALEX: Excellent, well my hope for this episode personally is that people will realize there are some things they can do to make a big difference. And I think the best way to go about that from here is, you said students who are engaged are the ones that are doing the best job of it. So a great first step for that is maybe apply to be on this podcast with us.

PETE: That’d be great.

ALEX: So that we can help you out. And so moneysmarts.iu.edu, please go there, fill out the application, come on the show. We’ll speak with you and talk about your goals, what you want to accomplish. I think that’s a great first step. Phil, thanks so much for joining us.

PHIL: Thanks for having me guys.

PETE: Thanks buddy, great.

ALEX: All right, we’ll see you next week on MoneySmarts U.

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