Do you understand your credit score? Does your child? Parents and students alike struggle to understand how credit works, how to build it wisely, and the severe consequences of making credit mistakes. In this episode, Ty Crandall shares his expertise on credit and financing and gives key tips on how to help your college student with building strong credit.

About Credit

“One of the frustrating things we see is that people are not taught this at a young age,” laments Crandall. A good place to start is with the FICO score to get an idea of how the credit score works.

Everybody should sit down with their children before they go to college and address this. Children need to be taught with lessons about how credit works and what it is.

The three major credit agencies populate a credit profile that is connected to your social security number, name, and address based on the credit you go out and get. This is averaged into a FICO score.

The FICO score has 5 separate components:

• Payment History.
  • 35% of the score.
• • 30% of the score.
  • The amount that is owed in relation to the limits or original amounts on loans.
• Length of Credit History.
  • 15% of the score.
  • How long you have had a credit profile.
• New Credit.
  • 10% of the score.
  • Has to do with new inquiries.
• Credit Mix.
  • It is the mix of credit that you have.
    • 2-3 loans, 1-2 mortgages, and 3 consumer credit cards is considered very good.
  • 10% of the score.

“FICO score reflects someone’s risk of going 90 days late within the next 12 months,” explains Crandall, “This will determine if you are approved or not approved and what rates you are given.”

Race, ethnicity, age, and gender are not factors into a credit score.

Companies used to call neighbors and would sell information to anyone that wanted it. Once information was put on computers, the government created the Fair Credit Reporting Act. This strictly regulates what information is allowed to be gathered and displayed.

Information is now regulated by the government and must now be 100% accurate, timely, and verifiable. Pulling a personal credit report requires written permission by you under Permissible Purpose.

Students Having Credit Cards

“Every parent needs to sit down and tell their child what is going to happen. A lot of kids are going to get into credit card problems early,” says Crandall.

Ways parents can help their child build credit:

• Co-sign on a loan.
  • If you are buying a car for your child going to college, have them co-sign on the loan to build history.
  • Create a CD loan where you put money into a CD at your bank and get a loan against that CD which is a good way to establish credit.
• Add your child as an authorized user to your current credit cards.
  • Your child can’t actually use the credit card, but they will get the benefit of the credit card history.
• Start a secure credit card, NOT a regular credit card.
  • Credit card companies will raise the limit of a regular credit card the more they spend which can cause trouble.
    • A regular credit card gives a limit of what you can spend, but the limit can be raised by the credit company and you can spend more.
    • A secure credit card you give money to the credit card company and the limit is capped at whatever is given to open the card.

Parents should discuss this with their child. “The minute they go late on a credit card by more than 30 days, they start doing SERIOUS damage to that credit report and it will take at least 7 years to fall off the credit report. The worse they let it go, it can be sent to judgment and indefinitely stay on their credit report,” stresses Crandall.

You can rebuild after making a mistake by creating more positive credit choices. “It is not an easy or fast process,” cautions Crandall. The negative item will remain on your report the full 7 years and will impact what loans, rates, and types of credit will be available.

Credit scores are used on quite a few things such as insurance, on loans, property renting/buying, or anywhere that you are going to be given credit.

“Every parent should sit down and have a conversation with their child about how credit works,” Crandall reiterates.

Student Loans

Federal and private loans show up on your credit report. Deferred payments are not negative. These are not a recommended way to build credit, but they are one way.

“Student loans are tough. If you default on a student loan, you aren’t able to get any other kind of government financing,” warns Crandall, “Including an FHA mortgage.”

Final Tips

“I think it is essential that parents know that kids will not get this education on credit in school. It has to come from the parents,” emphasizes Crandall, “If you don’t educate them, NOBODY WILL!”

Crandall suggests that students really should know:

• What the FICO score is.
• The damage caused by negative items.
• To be open with parents so parents can help early on if there is an issue and before damage is done.
• If your child is looking at building a business, there is business credit that can be established to help them once they graduate and are ready to start their business.

Crandall concludes, “Helping them get started on the right foot, with positive credit, is so valuable to the rest of their life.”

LINKS AND RESOURCES:

• http://www.creditsuite.com
• http://www.tycrandall.com
• Podcast available: Business Credit and Financial Show
• http://www.myfico.com/crediteducation/whatsinyourscore.aspx

THANKS FOR JOINING US!

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Brad is not affiliated with Credit Suite or Ty Crandall.

The post THCC68 – How to Help Your College Student Build Their Credit Interview with Ty Crandall, Business Credit Expert and CEO of Credit Suite appeared first on Taming The High Cost of College.