Building a good credit score sets a foundation for anyone who one day wants to own owning nice things such as a car or a home, according Program Manager for Student Engagement, Stephen Hodges. This is why college students need to have a thorough grasp of what good credit looks like and how it is achieved.
According to Hodges, there are a few concepts surrounding credit which are important to understand. The first is having financial literacy, or the ability to make informed, educated decisions about one’s finances. The second is having the personal responsibility to determine when it is appropriate to use a credit card and when that credit needs to be paid back. A good credit score is simply a history of proving a capability to pay off credit in full and on time. Credit is different from debt in that debt is an immediate withdrawal from one’s account, while credit is a loan of someone else’s money.
Kayleen Salchenberg, program manager in Student Engagement at Oregon State University, teaches a financial literacy program, and said some students might be taking the wrong course of action when tackling their own credit. Some students do make poor credit decisions, but it seems to Salchenberg as though many students might not be considering their credit at all.
“And other students are doing nothing about their credit – perhaps they have not established any credit at all.” Salchenberg said. “This is not necessarily bad or good, but again, at some point in the future they might need a car loan, for example, or want to rent an apartment and this little to no credit history might mean they are denied and need a co-signer.”
Building credit is something not a lot of college students come into college prepared for, according to Hodges. He said not many high schools prepare students for the prospect of owning a credit card, by no fault of the high school system, but rather to society as a whole.
“It’s just very important to understand, and have the financial literacy piece behind that, that a credit card is a short-term loan for 30 days, which is great if needed in a pinch. But one should never run a balance more than 30 days, so it’s all about personal responsibility. Many students don’t understand the difference between debit and credit cards or simply use credit cards to overspend since it’s so easy and convenient.” Hodges said.
Credit can be a very dangerous thing to someone who lacks what Hodges calls the single most important skill for holding credit, personal responsibility.
Along with personal responsibility comes financial literacys, and Salchenberg saidhaving the financial literacy to make informed, smart decisions with one’s credit is vital to owning and using a credit card.
“Students might realize how these decisions are impacting their credit and what that means – but many do not because, well, financial literacy is not a topic that is often required in high school or college.” Salchenberg said. “It might be discussed in their households, but not always.”
Personal responsibility means holding oneself accountable for making sure using credit does not turn into bad debt. Bad debt can occur quickly when loans, namely credit cards, are not paid off in time and begins to build interest. Contrary to many people’s beliefs, creditors, even debt collectors, want credit holders to pay as much of it as they can whenever possible, according to Hodges.
“Something a lot of young people don’t realize is credit companies want you on the phone, they want to have you pay whatever you can.” Hodges said. “And so, if you are in a situation in which you can’t pay it is way better to sit down and talk to someone on the phone and figure it out, than it is to ghost on them, because they find you, add fees and penalties and garnish your wages.”
While owning a credit card may seem daunting to many college students, it is actually a very important aspect of finance to get used to, and using credit cards is not the same as using debit cards, according to Hodges. While debt it is an immediate withdrawal from one’s account, credit is simply a loan of someone else’s money.
“I recommend putting every single dime that you can, as long as it doesn’t cost you anything, on a credit card and of course if you don’t go over about 50% of your credit limit.” Hodges said. “So over time you’ll show that, after years of doing that, that’s how you’ll establish credit. And make sure your card is always paid on time.”
Credit is not just for the credit holder, it is also for the creditor that is in charge of the credit that is being used. Building good credit is synonymous with building trust within the credit industry.
Good credits scores will make it easier for sutdents if they choose to do things like take out a loan for a house, buy a car or look for a credit card with good rewards.
Someone who pays off their credit monthly, timely, and fully will have a much higher credit score than someone who is untrustworthy with credit. Someone who uses credit irresponsibly lacks the personal responsibility needed to build trust within credit companies.
Omar Trinidad, instructor and program manager in the College of Business, said that an important component of holding credit is building trust in credit companies.
“Basically, from a crediter’s standpoint, you’re trying to earn their trust, and so if you have to borrow money from a lot of people, it looks like you’re hurting for money.” Trinidad said. “They will trust you more if you have one, maybe two credit cards open.”
Essentially, building credit is like building trust among the companies who need to know credit card holders are trustworthy. This lowers credit rates and gives card holders more access to more things they may want.