Loan rates may vary based on your credit health
By Lynnette Khalfani-Cox | Posted: 12/3/2018
open same windowFor many students, college is often the first time they have to manage their own money. As they start taking on this responsibility, it's important to help them understand the importance of budgeting, credit health, and credit scores, which can impact many parts of their life, including their ability to get an apartment.
After helping my oldest daughter—who is now a senior in college—build a strong credit score, I appreciate the role that parents play in credit education. Here are five key things to teach your college-age student about credit:
1. Your credit can help (or hinder) your job search
Many young people know that establishing good credit can help them get credit cards, opens in a new windowcar loan financing, or—years down the line—opens in a new windowa mortgage. But college students are often unaware of another primary benefit of having stellar credit: opens in a new windowgetting a leg up in the job market.
Increasingly, employers in many industries are checking the credit reports of job applicants. Job candidates with solid credit standing have an advantage over those with so-so or poor credit.
2. Blemishes on your credit can last up to 10 years
It takes some time to build up credit. In fact, 10 percent of your FICO credit score is based on the length of your credit history. That's one reason older consumers, who have had credit for many years, tend to have higher credit scores than students, who are just getting started.
Improving one's credit happens gradually, but financial mistakes can be instant—and long-term—credit-score killers. For example, if your child is 30 days or more late in paying a bill—like a car note, rent, or a credit card—that delinquency will be reflected on their credit report for seven years. More severe credit issues, like bankruptcy, stay on a credit report for 10 years.
So, encourage your child to pay all their bills on time, every month. It's easy to set up automatic payments or reminders in their phone calendars. Also, when you pay your bills, text your child to ask if they've paid theirs.
3. There are key ways to build credit
Some college students think the only way to establish credit is by taking out loans or actively using credit cards. But that's not true.
In recent years, credit scoring companies, lenders, and even the three main credit bureaus—Equifax, Experian and TransUnion—have started using so-called "alternative" credit data, which enables college students to begin building their credit histories without borrowing money or taking out credit cards. For example, college students who are renters can have their positive apartment rental payment history reported to the credit bureaus. Third-party companies independently verify the student's on-time rent payments with a landlord.
Another way a college student can establish credit is by "piggybacking" off his or her parent's good credit rating. This involves adding the student as an authorized user on the parent's credit card account. The student then "inherits" their parent's positive payment history and credit length on a specific credit account. The student doesn't need to directly receive the credit card or even use it.
Case in point: When I used the piggybacking technique with my college-age daughter, Aziza, I made her an authorized user on my credit card. She got the benefit of being added to a card with a spotless payment track record (and payment history represents 35 percent of one's credit score). Since I've had the card for many years, she also picked up my credit history.
But my daughter has never seen the card. After my husband and I added her as an authorized user, we simply had the card come to our home—and we put it in the drawer.
4. Good credit can help you save a lot of money
Finally, if your child is in college, you should emphasize to him or her that an excellent credit profile translates into big savings. That's because having pristine credit saves people money in numerous ways.
With good credit, your child can get the best loan rates and terms on everything from credit cards and car loans to mortgages and business loans. People with good credit may also save on other financial products, such as car insurance rates.
Over a lifetime, the savings on all these items can run in the tens or even hundreds of thousands of dollars.
5. Pay your student loans
If your child takes out student loans, make sure he or she understands the importance of paying the loans on time. It's an easy way to start building good credit, which can give them a headstart when it comes to borrowing for grad school—or passing a credit check for their first apartment.
Everyone knows that college can be the first step toward a good job. But with good planning and careful maintenance, it can also help students learn the organizational skills they need to take care of their finances. With your support and guidance, your college aged child can graduate with the degree they need for a job, the skills they need for smart money management, and the strong credit rating they'll need for the rest of their life.