When you're a teenager, you're thinking way more about prom and who's dating who than about ways to raise your credit score. And if you're one of the hundreds of thousands of moms sending your kid to college for the first time, you're probably wondering (maybe a little tearfully) if it marks the last time your children will be living under your roof.
Well, we've got some good or bad news for you, depending on your perspective. According to a study conducted by Twentysomething Inc., a consulting firm specializing in young adults, 85% of the class of 2011 will wind up moving back in with Mom and Dad once they get their degrees. The cause? A combination of a shrinking entry-level job market and crushing college loan debt.
“The average student accumulates over $23,000 in student loan debt and $4,000 in credit card debt during their years as an undergraduate student,” says Gabe Albarian, a former college student who avoided his own credit crisis during his college years by following the advice he offers in Financial Swagger, a guide for young people who want to escape the pitfalls of credit disaster. “All these stats basically tell the same story: Our next generation of college graduates will enter the next phases of their lives in a personal finance hell composed of a combination of crushing debt and poor credit.”
But it doesn’t have to be that way. Albarian has composed a few tips aimed specifically at helping those who are just entering college or about to graduate establish and keep a good credit rating.
New Credit Cards
Credit card companies love to hammer new students and new graduates with seemingly generous offers of unsecured credit cards. Don’t take the bait. There are other ways to establish credit without opening yourself up to the slippery slope of introductory interest rates that change after 6 months or the temptation to use that credit to live above your means. Try:
If your parents are financially responsible (which is not always the case) and pay their bills on time every month, I suggest that you be added as an authorized user on their credit card. Make sure to provide your personal information and Social Security Number to the credit card company so that your credit history will reflect transactions performed on this account. In about six months, after you’ve learned with the authorized user training wheels how to manage your credit reliably and have maintained a responsible payment history, you will receive your own credit card offers.
Secured Credit Card
The temptation will be to apply for an unsecured credit card, but that’s still not wise or necessary to establish good credit and good habits. Instead, apply for a secured credit card at your local bank. With a secured credit card, you place a nominal amount of money in a savings account that cannot be withdrawn, as it is used as recourse to pay back your debts in case you do not pay them yourself. In essence, your spending limit on your secured card is exactly the amount you place in the linked savings account—hence, your debt is secured by the money in your account. Just like a normal credit card, you will receive a monthly statement to pay off a portion or all of your debts, but your payment history will be reported to the credit bureaus. Within months you will receive offers for other unsecured credit cards. It’s not necessary to have more credit cards than you need, because not only will it present temptation, but it may also lower your credit rating. (For more on secured credits cards, read this.)
“The bottom line here is that once you have use of a credit card, you want to pay your bills on time, keep your balances low, don’t take on more credit than you need and if you’ve missed a payment, you should get current and stay current,” Albarian says. “Good credit can be your best financial friend as you go through life, and bad credit can be the ball and chain that drags you down.”
Gabe Albarian, a 28 year-old businessman, has worked in real estate sales, finance and investment for nearly ten years and has done extensive consulting work in personal finance for both individuals and groups. He earned his undergraduate degree in Political Science at the University of California, Los Angeles and is currently pursuing his Masters in Business Administration with an emphasis in Finance at the Marshall School of Business at the University of Southern California.
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