Poor Student No More

Building credit is no easy task — especially when you think that the only way to do it is to get a credit card or a loan, as this can very easily trap you in a never-ending cycle of debt (see previous post on credit cards).

Let me start with a question: What exactly is credit?

Credit is recognition of a person’s ability to fulfill his or her financial commitments based on previous actions. It provides a rating standard for lending companies, banks and other financial institutions (a credit score). They can estimate how likely you are to pay back your loan, mortgage or other liability. Your credit score helps to determine your interest rate and whether you get the loan at all. Credit is imperative if you plan on buying a house, applying for a credit card, applying for any loans, and even getting insurance.

So what exactly are the best ways to build your credit?

First, you should know exactly what your credit report looks like. You do not have to pay for this! Under the Free File Disclosure Rule of the Fair and Accurate Credit Transactions Act (FACT Act), the three nationwide consumer reporting companies — Equifax, Experian, and TransUnion — must provide you with a free copy of your credit report once every 12 months. But you have to ask for it!

These three companies do not provide your credit score for free. You must pay an additional fee for this.

A “good” credit score is usually anything above 620. But of course, it all depends on what you are applying for and who the provider is. Usually, if your score is below 620, the provider will require further inquiry into your credit report. This does not necessarily mean that you won’t get the loan, but it does mean you will have a higher interest rate.

Things that lower your credit score:

• Late payments - pay your bills on time!
• Maxing out your credit card - keep the balance at no more than 35% of the credit limit!
• Closing credit cards - don’t close the account, just cut up the card and never use it again!
• Opening a lot of credit cards in a short period of time - Don’t let Banana Republic or Gap sell you on those in-store credit cards. It may signal that you are a credit risk!

Things that raise your credit score:

• Check your credit report very carefully and look for any inaccuracies. Write a letter to the consumer reporting company explaining the inaccuracy. Sometimes these companies make mistakes and it can unnecessarily lower your score.
• If the info in your report is all accurate, then only time will raise your credit score. Negative information can stay on your credit report anywhere from 7-10 years.
• Pay your bills on time. No questions asked.
• Try to pay more than the minimum payment on credit cards or loans. Prioritize paying these off in order from highest interest rate to lowest interest rate.
• If you don’t have sufficient accounts on your credit report, try applying for a credit card with your bank. Credit cards are not a bad thing if you use them with caution and care.

Building good credit is extremely important for your financial future. Don’t let careless mistakes lower your credit score!

Peace, love and loans

Jess

Bottom line: do not default on your loans.

Do everything possible to avoid it: Apply for deferment, get a third and fourth job, sell your vital organs, whatever it takes.  Just kidding about that last part.

But sometimes things happen and we end up having a lapse of judgment or let circumstances get out of control, and you cannot afford your payments.

If, for whatever reason, you happen to default on your loans, this is what happens and what you should do:

When you default, your loans can be turned over to a collection agency.  You can also be sued for the full amount of your loans, taken to court, and required to pay the court fees.  The government may take a percentage out of your paycheck each month to start repaying the loan.  Basically, once you default, the lender can use whatever legal means necessary to get their money back.  Default can also prevent you from renewing professional licenses or enlisting in armed services.

To get out of default, you must arrange payments with your lender.  These will have very strict rules and criteria, as you are now expected to default and you are risky.  After six consecutive, on-time payments, you are eligible for Title IV aid.  After 9 or 10 on-time consecutive payments and received “rehabilitation,” you will no longer be considered default.

“Rehabilitation” means that payments are adjusted to be “reasonable and affordable” based on your disposable income.  Payments can be below the minimum payment if the lender so decides.

Again, do everything possible to avoid defaulting, as it will set you back in actually paying off your student loans, as well as any other debt you may have.