It’s no secret that establishing and maintaining a good credit rating is vital to consumers. Those with mortgages, car payments and a wallet full of credit cards have established a history that has a huge impact on maintaining their credit in the future.
But what about recent college graduates or first-time buyers of automobiles who have yet to establish a history? Here’s how to start writing your own story to secure the credit you’ll need.
Experts say it’s important to begin establishing your credit rating with your eyes wide open. Those in the 18- to 25-year-old age group are particularly vulnerable to being victimized by outrageous interest rates and “easy money” that could affect their credit history down the road.
Paul Horgen, president and CEO of IBM Mid America Employees Federal Credit Union, based in Rochester, Minn., tells this story about his son, a college freshmen:
“Shortly after my son began attending classes, he received an application for a credit card, along with a $1,600 check made out to him,” Horgen said. “He could have cashed it right then.
“I found out about this and looked into things further. It turns out he would have been charged more than 20 percent in interest. They gave him the money without his having any ability to pay it back.
“Kids between 18 and 21 are constantly getting these credit card deals from distant, out-of-state companies. If 2 or 3 percent of the people they lure in don’t pay, so what? With the interest rates they charge, the other 98 percent who pay their bills make up for it.”
Credit card debt is a leading contributor to a poor credit history. Another danger lurks with car loans. Norma Fabela, assistant vice president of the First Suburban Bank of Maywood, reports seeing interest rates as high as 49 percent.
“One of the problems I’ve noticed with debt seems to occur when buying used cars,” Fabela said. “People don’t read the backs of contracts and I’ve seen rates as high as 49 percent. There’s no cap in Illinois that I know of limiting what a dealer can charge for his financing.”
Sherry Scripel, collection manager for the Premier Credit Union of Palatine and Schaumburg, believes those in and around college age are likely to be inundated with countless ploys to accept credit.
“I’d estimate by the time someone goes to college, he’ll receive nearly 20 applications for credit cards,” Scripel said. “Once kids are 18 or so, it seems as if everybody out there finds you.”
Mary Henthorn, president of Midwest Bank of Hinsdale, believes problems with credit stem from young adults not being able to manage money.
“The problem really isn’t finding credit; it’s kids not being taught how to manage their money and running up big bills,” Henthorn said. “Kids go to college and get their first taste of freedom. Then somebody’s offering them credit along with that freedom, and they’ve not ever had to budget something. Unless the parents step in, their credit rating can really be ruined.”
A safer way to begin establishing a history is to start with banks or credit unions you already use. Parents who have a good history with their bank or credit union usually will find it willing to establish a line of credit for their college student. Similarly, saving accounts for minors that were established years ago could be used to help establish credit when kids are older.
“The whole area of credit today is unique. So many now acquire it through a family membership,” Horgen said. “With us, parents have signed up years ago and have shown us a thrift plan, their savings accounts and so forth. We’re willing to establish credit for their college-age son or daughter. We’ll give them a debit card with a line of credit for $500 to $1,000 and see if they use it responsibly.”
Scripel says options like overdraft protection on small open-end loans help clients establish credit as well as protect themselves.
“We offer overdraft protection on a small, unsecured loan people can get with a signature–anywhere from $250 to $1,000,” Scripel said. “If they use the money in a checking account, make a mistake and a check is returned, it won’t count against their credit report. And making regular monthly payments against their loan helps build their credit score.”
Henthorn said another option is to borrow money and put it in a savings account, then use it as security against another loan.
“As the monthly payments are made, the person begins to create a history and shows his ability to pay,” she said. “We also offer overdraft protection where a minimum of $25 is deducted each month for any checks that are returned. … The good thing is returned checks don’t affect someone’s credit rating and the monthly deduction shows you are paying back your debt.”
Experts say it’s important to systematically build your credit rating in order to increase borrowing capacity in the future. Horgen believes as credits limits increase, it’s also important to gain experience in shopping for credit and to note important differences among lenders.
“The differences among credit-card lenders isn’t that significant,” he argues. “After college, when you’re looking at more significant purchases like a new car or home, you’ll want to look more carefully and understand your options. With something like a mortgage, there are significant differences, and it’s important young people gain experience and the tools to compare.”
Once you are given a line of credit or receive a loan, be sure to protect yourself by following these guidelines:
– Never use more than 50 percent of the credit you’re allowed.
“You want to keep your debt ratio low. If you’ve reached your limit on a charge card, it shows you don’t have any more available credit,” Scripel said. “You no longer have any borrowing power, which can affect you when you’re looking for something bigger like getting approval for a mortgage.”
– Avoid the temptation to carry too many credit cards.
“People shouldn’t carry more than two cards for all their charges, especially when they’re first establishing credit,” Henthorn suggests. Don’t let the ease of obtaining credit cards or cash advances lure you into a trap.
“The rate of interest you’re being changed is one of the issues I tell people to look at,” Henthorn said. “Sometimes the interest charges are so high, your payment each month only covers that and nothing on the principal.”
To establish credit, borrow a small amount of money, $500 to $1,000, and put it in savings. Use it to secure another small loan, and make sure you make regular payments to repay both amounts.
Another option is to visit a bank where you have an established savings account and ask for a debit card with a small credit limit. If you don’t max out your card and make regular payments, your credit limit should be increased.
You could also have your parents co-sign for car loans or other credit. Their good rating will secure you the loan, while your being responsible about the monthly payments will boost your credit rating and limits.
The Consumer Action Resource Center says if you have a steady income and have lived at your present location for more than a year, apply for credit with a local business.
The three major bureaus where you can call and request a copy of your credit report are Trans Union (800-916-8800), Equifax (800-685-1111) and Experian (888-397-3742). www.consumer-action.org.
