Credit in College: Easy to Get, Easy to Ruin
Credit cards: a steppingstone toward good credit
"The best time to get a credit card is in college," says Liz Pulliam Weston, the author of Your Credit Score, a guide to fixing and maintaining good credit. From the perspective of a credit card company, college students are the perfect clients: inexperienced enough to accrue interest, but still under the umbrella of parents ready to bail their kid out.
When choosing among the credit card offers hurled at you on campus, don't just look at how neat the giveaway is. Find a card with a low annual fee, no application fee, and a grace period of 20 days or more. Most important, make sure it reports to the three major credit bureaus. If not, you won't be building any credit at all. Most of the major names, like Visa and MasterCard, will do the trick.
At first, cards offered will have low credit limits and high interest rates. To maximize your credit score, spend lightly (about 30 percent of your limit) but regularly, and pay your monthly balance in full. "Just don't get in the habit of carrying credit card debt," says Pulliam Weston.
Credit cards: a stumbling block toward good credit
While a carefully maintained credit line is healthy for your future, going astray, even once, can be disastrous. Forgetful types should embrace the Internet and set up an automated, electronic system for paying bills. For students who change addresses every year or are just really disorganized, it's nice to not rely on a paper bill as a reminder.
As for spending, keep it in check. One of the most important factors in a credit score is what percentage of your credit limit you spend. Ideally, that's 30 percent. That means, on a starter card with a $500 limit, you should only be spending $150 a month. The closer you get to the limit, the more negatively that reflects upon you. Some banks, like Capital One, don't report credit limits, so bureaus will use your largest balance as a guide. If you end up spending around the same amount each month, it will look as if you're maxing out your card each time. Avoid this by checking your credit report and making sure the limit is accurately reported.
Overloading on plastic to boost your limit, however, is no solution either. "Don't go nuts applying for credit cards," says Pulliam Weston. She suggests two to three cards as plenty for the duration of college. And start off with one at first. Because it will most likely be a terrible deal, wait until you earn enough credit to get a better card, one with more rewards and one that you might want to keep for a long time. An aspect of your credit score is the duration of your credit lines, so if you switch cards too often trying to find the "right fit," you're likely to sabotage your score along the way. Before applying for a new line of credit, check cardratings.com and bankrate.com for a good match.
Student loans: because debt is usually necessary
For most students, given the high cost of tuition, housing, food, and books, debt is inevitable. But some types of debt, like student loans, are less costly than others. Even though student loans require the extra step of filling out a Free Application for Federal Student Aid, or FAFSA, use them in lieu of credit cards. Student loan interest rates are almost always lower than credit cards', and they can offer more payment flexibility to low-income households.
Well-maintained student loans also look good on credit reports. Much like mortgage and car payments, student loans are installment loans, where you owe a fixed amount each month. Credit cards, on the other hand, are classified as revolving credit, which fluctuates with how much you charge. They both represent money you owe, but future lenders will look favorably on diversity in your credit line.
A warning about student loans: Although the interest on them is relatively low, this is still money that needs to be repaid eventually. If you are overextending yourself financially, you'll be more apt to default on payments after college, which is just as bad, if not worse than during school. Pulliam Weston recommends that students borrow for their education only how much they expect to make in their first year at their job. "You've got to be more realistic than most people are used to," she says.
Utilities and rent: other potential pitfalls
Sick of the dorms and ready to move off campus? A shared home, where two or three or eight people live in one house, can be a great money saver, but it can also be a hassle and hazardous to your credit. Utility and rental companies are more frequently than ever reporting your payment history to credit bureaus, and legal action such as collections or evictions will probably be reported as well.
Be wary of taking on the responsibility of paying the utilities for a shared house. Even if you are the most dependable housemate, make sure you have the financial cushion to cover the gas, cable, or water bill when a roommate doesn't pay up. Your name is the only one on the account, and your credit is the only one that suffers if you can't come up with the money.
When it comes to rent, don't think you're safe from a roommate's delinquency because you all pay the landlord with separate checks. If one roommate defaults in a joint contract and the landlord resorts to legal action (filing for eviction or a collection), then everyone with his name on the lease may end up with a black mark on his credit report.
The best way to prevent trouble is to know your roommates really well. Are they responsible and trustworthy? Even if you're sure they are, you should also draw up contracts for everything. Susan Choe, director and supervising attorney at the student housing legal clinic at Ohio State University, recommends cotenant contracts that spell out each person's responsibility. "There's nothing too small to place in a contract," she says. Choe's organization provides mostly information for Ohio residents, but it also offers sample roommate contracts at http://moritzlaw.osu.edu/shlc/ if you need a place to start. Check to see whether your school offers similar legal services.
Once locked in, a system of accountability will prevent surprises and unnecessary headaches. Set up a common checking account where each roommate pays her bills. If one person doesn't deposit her share, everyone else will be able to see it and confront the person right away. This way, there won't be any surprises at the end of the year.
Identity theft
The sad thing is that you can do everything right and still run into financial disaster. Brendan Classen, a junior at the University of Minnesota, found that out the hard way. While applying for a car loan, Classen discovered that someone had used his name to set up four months' worth of cable service at an address where he had never lived. The bills went unpaid, and the collection was filed on his credit report.
It's no secret that identity theft has become pervasive, and the victims have become increasingly young. Reduce your risk by shredding any papers with important information, sparingly giving out your Social Security number, and boosting your online security. But even the most cautious can become victims. Classen suspects someone lifted his information from one of the many applications he filled out during a job search blitz, while the ubiquity of preapproved credit cards and Social Security number use has made all consumers more vulnerable.
In the end, the best way to deal with identity theft is to catch it early. Even if you're sure you've paid all your bills on time, check your credit report at least once a year and definitely before any major financial moves. Myfico.com compiles credit reports and scores from the three major credit bureaus. The bureaus, Equifax, Experian, and TransUnion, also provide reports (which are free once a year) and scores from their own sites. Classen got the loan despite his trashed credit, albeit with a much higher interest rate. He'll be able to refinance six months after he was first approved, but the headache of clearing his name lingers. Partly because it's been months since the cable account was abandoned, Classen continues to wrangle with the cable company, collections agencies, and credit bureaus. The lesson? The earlier you catch mistakes or theft, the easier it is to get it fixed and off your record.
More about credit:
• Building Good Credit: A Guide for Young People and Parents
• Who Checks Your Credit Report?