Should College Students Have Credit Cards?
Written by Matt Wegner Founder and Lead Counselor, Matt Wegner Financial Coaching, www.financialexcellence.net
I have a couple of thoughts on this subject.
My first concern is that as well as you have taught your daughter, the credit card in her pocket will serve as a great temptation over time. It will always be there whispering, “This is an emergency. You’re out of beer money. Use me. I’m convenient. It’s only a few dollars this time.” At least that’s what my credit card said to me when I was in college. I think she’ll be better able to stick to the cash only values you’ve taught her if we remove the temptation altogether.
She will indeed need a good credit report to get approved for a mortgage loan, but she won’t necessarily need a good FICO score. Here’s the difference. Your FICO score (generated by the Fair Isaac Corporation) is based on the following: 1. Payment history (35%). 2. Amounts owed (30%). 3. Length of credit history (15%). 4. New credit (10%). 5. Types of credit in use (10%). It’s almost entirely based on how much credit or debt you’ve had and how you’ve used it. That then creates a score that is supposed to indicate how well you will handle credit and debt in the future. Your credit report lists all the accounts you’ve held in the past, and whether there was any history or patterns of late, missed or delinquent payments. Many banks got themselves into trouble recently (See Economic Crisis, broadcast daily on every news channel…) by loaning strictly based on credit scores. I’ve even been told that you can’t borrow money any more without a FICO score. But the truth is there are small, local banks and credit unions that still use their brains and take other things into consideration when underwriting loans. It’s called manual underwriting.
Things they consider include:
- Your job history (length of time with a steady income). If you’ve had a steady job with the same company for a few years, you appear to be a reliable person with some discipline.
- Your credit report and payment history for things like rent and utilities. If you miss payments on these, they will report the incidences on your credit report, so keeping them current shows you can manage regular payments.
- Your account history with that bank. If you’ve had a frequently used checking account with that particular bank for years and you’ve never had an overdraft, it shows that you might have a clue about how to handle money.
- Your debt to income ratio, meaning how much total debt are you asking to take on in relation to your income.
Now there aren’t too many banks these days that fit the small hometown bank description with a personal touch, but they are out there. Again, credit unions and local banks are the best place to find the personal service with the ability to use more than just your credit score. The best advice is to get through college with as little debt as possible (zero is preferred) and start saving for the down payment on the home. For mortgages I recommend at least 20% down, with payments equal to or less than 25-35% of your take home pay on a 15-year fixed interest rate. If your daughter climbs the Ladder of L.I.F.E. she will be debt free and have the down payment saved up within a few years after college. Saving for the down payment would come just after fully funding the emergency fund and before retirement savings (or after retirement savings depending on her age and income after graduation). By then she should have a good job history, good payment history on her rent and utilities, good account history with the bank and good payment history on her student loans (if applicable). She will have the student loans paid off before she saves the down payment so she will have a great debt to income ratio. By going to a bank that actually uses their brains instead of a number she should have no problem getting approved for a mortgage.