John was a college student who was working to establish credit so that he can build a good financial future. One month there was an oversight and he missed his car lease payment by a few days. He panicked, thinking that his credit was ‘ruined’. Fortunately, his parents set him straight about how the credit ranking system works. But what was exactly wrong with their son’s understanding that set off his panic state? Students should be taught ahead of time the truths and myths of obtaining credit, specifically, John should have been told the following:
- Unless he is 30 days (or more) behind on a payment, his credit will not be affected.
- Even if he did pass 30 days of nonpayment, the impact on his credit report will diminish as time goes by and as he keeps building his credit up.
We can use John’s case history as one that is indicative of students who are uneducated about managing credit and why it is important to maintain a good credit score.
One of the underlying factors of obtaining a good credit score is determined by the amount of time that you have had credit. Getting credit early in life is a great opportunity to establish credit, especially for college students who apply for a credit card. In the case of the John’s situation, he already had a car lease, co-signed by his father, so he was able to get a head start. (John has a part-time job so he can make the lease payment). When he applies for more credit, e.g. a credit card, the bank will see that he has established some credit and if his score is good, they will most likely give him a card, possibly starting at a low credit limit, but he will get one.
Be Careful When Applying for Credit for the First Time
However, many students are not aware of the variances in interest rates and other terms that credit card offers give. Some offer 0% for six months on purchases, but if the entire balance is not paid after the six months, all the interest for those months are accrued and the card holder gets hit with a lot of extra interest to pay back.
With that said, college students (and their parents) need to be vigilant about what credit cards their sons and daughters are applying for and what the terms and interest is. Banks tend to flood young people with offers. One student said she gets letters from banks to apply for a card every other day. This can become problematic if not managed properly.
Car loans are another opportunity for establishing credit at an early age, but there are a lot of variables to be considered. How much down payment is needed? What are the terms (how many months to pay)? What is the interest rate? These are just some of the things parents should explain to them so that they know what they are getting into.
Why is a Good Credit Rating Important?
If young people (or anyone for that matter) do it right, they will be set for life as far as not just being able to acquire a car, TV, washing machine, credit cards and most importantly, a house or condo, but they will also be able to obtain these items at a good or excellent rate. This could eventually save you thousands of dollars in interest over the years.
With that said, parents should assist their sons and daughters in establishing good credit before they reach the qualifying age and they need to be extra vigilant at this time, as young people become a target for an abundance of credit card offers. They should be taught about how to manage credit responsibly. Then when they do get these offers, they will be more cognizant about which ones to choose (if any) and how to control their own credit from that point on.