Whether it affects students directly through growing loan debts and credit card bills or indirectly through annoyingly catchy commercial jingles and advertisements, students are regularly confronted with the terms: credit, credit score and credit report. Although these terms are important, some may not fully understand what these aspects of credit mean.
Jim DeWilde, associate director of Westerns’s financial aid department and Reid Frederick, social responsibility representative for Whatcom Educational Credit Union, have experience dealing with credit. They provide many pointers and cautions that college students should consider when venturing into the financial realm of credit.
Frederick, who will be a guest speaker at the student financial club Money Sense’s seminar about credit at 5:45 p.m. on Feb. 29 in Communications Facility 120, said that students should wait until they have a source of income before attempting to get a credit card. He said that when first getting a card, the credit limit on the card should be equal to or less than the individual’s two-week income so that there is never a chance that they could charge more than they could afford.
Credit is essentially borrowing money to cover current expenses. While individuals with student loans are already experiencing one aspect of credit, DeWilde and Frederick both said that the most common instrument of credit amongst college students is the credit card.
“Credit cards should be looked at for emergencies. They’re a tool for payments,” Frederick said. “Looking at it as a tool for buying stuff that you couldn’t buy otherwise is a frame of mind that gets people in the most trouble.”
The credit limit on a card is the maximum amount allowed to be charged before additional fines kick in. Frederick said that students should aim to only charge fixed payments, such as gas, insurance and utilities, and try not to use a credit card for recreational fees or to splurge on unnecessary costs. By covering only fixed costs and staying under 50 percent of the credit limit, individuals ensure that they are not overcharging their card, which is detrimental to one’s credit history and score.
“If you have a credit card and you’re using it wisely and you’re able to charge but pay for everything that you charge each month in full, you’re not running a balance on your credit card,” DeWilde said. “Then, you’re responsibly using it and establishing good credit history.”
While it is not necessary to pay a credit balance in full each month, doing so ensures there are no interest charges—the cost of borrowing money—on the balance that is carried over each month. These interest charges are usually variable depending on one’s credit history and can be steep. The various interest rates a lender can charge are expressed in the terms and conditions for that credit card, a thing that DeWilde said is absolutely critical to read when applying for credit.
“We’re so used to, in the Internet age, any time we sign up for a new Internet service and we see that ‘Terms and Conditions’ button, we never read it, we just don’t,” DeWilde said. “For financial products, I want to stress to students: Read the terms and conditions, because they really make a difference.”
Credit history and credit scores stay with people once they begin charging expenses. These two things are the biggest determinants in interest rates and insurance premiums. Landlords also typically take an individuals credit report into consideration before leasing out a property.
The credit score is one of the most mysterious aspects of credit. While there are many different types of credit scores reported by different credit agencies, the most common is the FICO score.
Founded in 1956 by engineer Bill Flair and mathematician Earl Isaac, the Fair Isaac Company designed a complex mathematical model to apply to one’s credit history to determine a FICO score that summarizes credit risk to potential lenders. A FICO score is based on five aspects of the credit history: payment history, amounts owed, length of credit history, new credit and types of credit used.
The two most important parts that comprise 65 percent of the FICO calculation are payment history and amounts owed. By not missing payments and keeping a small or zero credit balance, an individual can improve their credit score which will lead to lower interest rates and greater ease when applying for loans, rentals or insurance.
DeWilde said that annualcreditreport.com is a free, government-sponsored website that provides every person the right to have their credit report disclosed to them once a year for free through one of three major credit reporting agencies, TransUnion, Equifax and Experian.
He said that other frequently advertised free credit reporting sites are such as freecreditreport.com are not usually free at all and are usually a scheme to try and solicit money from users.
“I’d like students to start checking their credit history, even to see if there’s nothing there,” DeWilde Said. “I recommend that students stagger when they ask for their reports. So in September they asked from Transunion, January from another and May another so they’re continually getting a view of their credit report.”
DeWilde said that while it is a good idea to start building a credit history in college, it should be taken on a case-to-case basis depending on the individual.
“My own asterisk is yes it’s a good idea only if a student can responsibly manage that credit card. If they get themselves in trouble and they don’t use it responsibly then it’s awful I’d say don’t do it,” DeWilde said. “If you’re responsible, you know how to manage money and you’re not going to go out and charge unnecessarily, I think it’s a great way to begin learning the financial planning lesson now.”