Credit 101: Send Students Off to College With a Plan For Managing Debt and Building a Solid Credit History

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NEW YORK, August 4, 2011 — In today’s difficult economy, many college students are turning to credit cards to finance their education, using them for everything from everyday necessities to books and tuition. Unfortunately, this can result in an excessive amount of debt that can affect their credit score, according to the Insurance Information Institute (I.I.I.).

 
Students are using their credit cards more frequently and racking up more debt than in years past. According a 2009 study by Sallie Mae, a leading provider of student loans, the average undergraduate carried $3,173 in credit card debt in 2008. College seniors graduated with an average of $4,138 in credit card debt, up 44 percent from 2004, the last time the study was done. The study found that nearly 30 percent put tuition on their credit card, an increase from 24 percent in 2004. In total, 92 percent of undergraduate credit cardholders charged textbooks, school supplies, or other direct education expenses, up from 85 percent in the previous study.
 
“College students are finding it much harder to make ends meet because everything is more expensive in today’s economy and interest rates on credit cards have gone up. If they’re not careful, by the end of the year, many students will have dug themselves into a financial hole that will be very difficult to circumvent,” said Loretta Worters, vice president with the I.I.I.
 
Eighty-four percent of all incoming freshman will have a credit card when they arrive on campus and most undergraduate students will have four or more cards by the time they graduate, according to Sallie Mae. 
 
Sally Greenberg, Executive Director of the National Consumers League, pointed out that young people are frequently unaware that their bill paying history will affect their credit history. “Many graduates don’t think they need to worry about their credit score until they need a mortgage to buy a house. It can come as a shock when they find out that employers routinely access credit scores as part of the application process.”
 
According to the College Board’s Trends in Student Aid Report 2010, 65 percentof private nonprofit bachelor’s degree recipients had an average student loan debt of $26,100 in 2008-09, an increase from 63 percent, with an average debt of $22,300 (in 2009 dollars) in 1999-2000.
 
“Learning how to manage student loans, credit cards and other debt is essential for college students,” said Worters. “Establishing financial skills early on and working to build a good credit standing will affect their lives both now and in the future.”
 
A person’s credit history begins with their first credit card. And good credit can help savvy college graduates save money in the following situations:
  • Applying for a Job. Potential employers now routinely check a person’s credit history as part of the hiring process. With many applicants vying for positions in today’s tough economy, a solid credit history may provide a competitive advantage in the job market.
  • Renting an Apartment. Landlords often rent to the applicant with the best credit history. In many urban areas, available housing is at a premium. Those with a good credit history will more easily find an apartment to rent and may avoid a larger security deposit and/or the need to have the lease co-signed by a guarantor, such as a parent or an employer.
  • Signing Up for Utilities. Local phone, cable, electric and gas companies will on occasion waive cash deposits for customers with solid, established credit histories.
  • Securing Loans. Having a better credit history makes it easier to get a car loan or mortgage, often at a more competitive interest rate.
  • Insuring Your Auto or Home. Having good credit can ultimately save consumers money on auto and homeowners or renters insurance, through a stronger credit-based insurance score.
Insurance scores are different from credit scores and it is important to understand the distinction. Your credit score is a number that represents your overall credit worthiness; predicting the likelihood of delinquency or non-payment of credit obligations. It encompasses everything you have ever done credit-wise, from your very first credit card to the regular bills that you pay.
 
Your insurance score, on the other hand, is based in part on your credit score, but it involves other factors pertaining to your insurance history. For example, with auto insurance, information about age, gender, income, the number of car insurance claims you have made, Department of Motor Vehicles points, your timeliness with payments, etc. all factor into the equation that determines your score. Insurers use this score to determine whether you are a good risk to insure. 
 
In order to develop a good credit rating, parents and students need to work together on a financial plan for college. Specific educational expenses including tuition, room and board, books and fees can be viewed as “good debt” and can be covered through student loans, grants and the like. Day-to-day college expenses, including personal needs, transportation costs, telephone and other incidentals, are the types of expenses that students should not charge on credit cards.
 
“In most cases, college is the first opportunity for young people to make independent financial judgments,” said Worters. “Carrying high, unpaid balances is one of the quickest ways to incur too much debt and fall behind in payments. If college students plan to use a credit card regularly, they should have limits and know ahead of time where the money will come from to pay the bill at the end of the month.”
 
When deciding on a credit card, students should read the fine print and shop around for the best terms. Look for cards that:
  • Have an annual percentage rate (APR) at or below 15 percent
  • Offer a grace period of at least 25 days
  • Feature no annual fee 
To develop good financial habits, the I.I.I. suggests that students:
  • Plan and stick to a budget. Living within a budget is an important skill to master. 
  • Pay credit card bills on time. Not only will paying bills promptly start to build a solid credit history, late payments can also be costly as they include stiff penalties and may result in an increase in the annual percentage rate (APR). 
  • Use credit responsibly. Remember, credit is a loan—one that will need to be repaid with interest. 
  • Keep in touch with creditors. If students change residences and forget to tell their creditors, a series of lost bills can result in a black mark on a credit report. Such black marks stay on credit reports for seven years and can significantly lower a credit score. Most students on campuses today have computers, so they can take advantage of electronic billing and payment in order to avoid lost bills. 

What Can You Do to Improve Your Credit Score If It Has Been Damaged?

  • Do not pay someone to “fix” your credit history. Some credit repair firms promise, for a fee, to get accurate information taken out of your credit report. Accurate information cannot be deleted from your credit report. They may also promise to fix your credit report by challenging information it contains, but they charge you a fee to do so. This is something you can do for yourself without paying the fee. 
  • Create a plan to improve your credit over time. Pay your bills on time. Pay at least the minimum balance due, on time, every month. If you cannot make a payment, talk to your creditor. Work to reduce the amount you owe, especially on revolving debt like credit cards. 
  • Do not max-out your credit limit. As a general rule, keep limits on credit cards below 50 percent to avoid the risk of hurting your FICO® score. 
  • Limit the number of new credit accounts you apply for. New applications for credit in a short time will generally lower your credit score.  
  • Consider the APRs of your credit cards. APRs are not currently reported by credit card companies to the credit bureaus, and therefore they cannot be explicitly considered when computing your FICO score. However, you should know the APR of all your cards so you can add debt to a low APR card and pay it off from a high APR card. Paying off cards with higher APRs devotes less money towards interest, and leaves more money available to pay down your balances. 
  • Keep at it. Your credit history will improve over time if you make changes now. If you manage your credit obligations effectively, your credit-based insurance score will improve as well. 
  • Consider credit counseling. If you find yourself in a financial bind, consider credit and money counseling. Information is available from the National Foundation for Credit Counseling or the American Center for Credit Education. Students should also consider taking advantage of the financial literacy programs that are offered by many colleges and universities. Information on how to improve your credit score used by lenders is available at MyFico.com.
  • Review your credit report regularly. You have the right to dispute any information in your credit report. By law, the credit reporting agency must provide you with a free copy of your credit report and must correct inaccurate or incomplete information at no charge to you. The three national credit reporting agencies are:
 
For more information about credit-based insurance scores and a free copy of your credit report, you can access information from Fair Isaac® or the Federal Trade Commission (FTC). 
 

 

 

 

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