The past year has been one for the history books. Between a pandemic, an economic crash, and a new President of the United States, there hasn’t been a year like 2020 in a very long time.
With that said, 2021 isn’t quite yet back to normal. We still have a long way to go. In the meantime, though, there are still students like you who are trying to get their lives started during an unprecedented time in world history.
Part of starting your life is building up a credit history, and although banks aren’t as fast and loose with money as they were during the 2010s, there are still ways that students can get started with building their credit in 2021.
What Is Credit, And Where Does It Come From?
Credit doesn’t just refer to a 3 digit number, or a credit score. Instead, credit is just the ability to borrow money or use certain goods or services. The idea of an individual having credit dates back to antiquity, where some individuals were seen as more creditworthy than others based on their reputation and their status.
As we started to modernize and more people started to demand access to credit, there was a need for a standard way of judging creditworthiness. The first credit bureau, Retail Credit Company based in Atlanta, was the first company to collect information about people to give to lenders to help them make decisions on who to lend money to.
Over time, more opportunities for lending arose as the American people became more confident in the economy. Mortgage lending grew substantially with the establishment of Fannie Mae in 1938 and with help of the GI Bill in 1944. The GI Bill gave World War 2 veterans the ability to get a mortgage guaranteed by the federal government.
The first credit card was launched in 1950 as a charge card, and slowly the idea of a revolving credit card became much more mainstream. The Fair Credit Reporting Act of 1970 made it illegal to collect information on race, sexuality, and disability which had been used to discriminate against would-be lenders. More credit bureaus began to take form, including TransUnion, Equifax, and Experian (or the big 3 credit bureaus today).
Later, in 1989, the Fair Isaac Corporation (FICO) partnered with the Big 3 credit bureaus to create a 3-digit number to represent creditworthiness, now known as a FICO Score or a credit score.
Why Is Building Credit So Important For Students?
Building credit is important for anyone who wants to have the ability to borrow money to meet their financial goals. Good credit is highly beneficial, and people with good credit are able to get lower interest rates, larger borrowing amounts, and access to more goods and services provided by lenders and card issuers.
The biggest area where having good credit helps is for mortgages. If you want to own a home someday, chances are you’re going to have to take out a mortgage to buy it. A mortgage is debt borrowed in order to purchase a piece of real estate, most commonly used by consumers to purchase single-family homes. In order to get a mortgage, you need to demonstrate ability to pay (which is usually based on your debt-to-income ratio), solvency (based on your debt-to-equity ratio) and creditworthiness (which they check based on your credit history and your credit score).
As a student, you might have a significant amount of student debt. Building good credit can allow you to consolidate or refinance your student loans later, which can help you get lower interest rates and even lower payments. This could help you grow your savings, which can then be used for a down payment on a home after you’ve cleared out your student debt!
How Can A Student Build Credit?
Take advantage of student credit card deals and use your card responsibly.
Students are offered credit cards all the time, and banks use student credit card and banking deals to get new customers. Don’t take the first student credit card that shows up in the mail: do your research. Go to Google and find out which credit card offers provide you with the best terms.
More importantly, you want to use your credit card responsibly. Using a credit card responsibly entails doing the following:
- Use your credit card to pay for things that you CAN afford, not things you CAN’T afford.
- Don’t charge more than 30% of your available balance, if you can help it.
- Don’t miss a payment. Ever. It’s better to pay the minimum payment than to pay nothing at all.
- Pay off your balance in full every month. This allows you to avoid interest charges.
As a student, we highly recommend you avoid putting large purchases on your credit card.
Pay down your student debt while you’re in school.
Many students decide to work while they’re in school in order to help pay for textbooks, living expenses, and entertainment. However, one great way to build credit early is to start making payments toward your student debt while you’re still studying.
You don’t have to put a lot of money toward your debt while in school. Just pay what you can afford. These payments will lower your overall debt burden later in life and will help you build a good credit history even before you graduate.
Learn financial discipline habits early.
Financial discipline is one of those things that’s based not on laziness or morality, but on habit. People with good financial discipline have the habits necessary to keep themselves above water, even during difficult times. It’s their habits that allow them to withstand times of reduced income.
Good financial habits include:
- Setting aside money for savings every month.
- Keeping a living budget by keeping track of expenses as they compare to income.
- Paying off credit cards in full each month.
- Avoiding unnecessary consumer debt.
- Keeping track of credit card transactions and spending.
If you don’t have an income, you won’t be able to pay off large credit card bills or save money. Instead, keep track of your spending and come up with ways to reduce it.
Learn more about good financial discipline habits!
Has Your Identity Been Stolen?
Identity theft and data breaches are increasingly common threats to anyone who makes transactions online or shares their information with an online platform. Identity theft has evolved into various forms with fraudsters finding new ways to bypass security systems. Read this blog about data breaches on Facebook & LinkedIn.
A 2019 report put the number of identity theft victims at 13 million in the US. Attacks cost them $3.5 billion out of pocket. The risk of identity theft is higher for those on social media platforms. Identity thieves use automated software to scrape and aggregate public information from social media platforms creating a profile that can be used fraudulently.
327 million users in the recent LinkedIn data breach suffered such an attack. Facebook has recently come under fire over a misreported data breach that affected more than 500 million of its users’ personal information.
It seems we’re all at risk of having our data “pwned” in a breach or getting hacked. How can you protect yourself as a consumer? To better protect yourself from a data breach, you need to know what you’re up against.
The Most Common Types of Identity Theft Online
Account takeover occurs when someone gains access to your accounts and takes control of them without your knowledge or consent. They can transact and withdraw funds just as you would.
Debit and Credit Card Fraud
This type of fraud occurs when someone makes unauthorized transactions using your card. They don’t need your physical card, the card number, pin, and security code are sufficient to do damage and even attempt hacking your other accounts.
Online Shopping Fraud
This is most common when using public WIFI. Scammers will pose as fake merchant websites to collect your payment information when you check out.
If your mail is intercepted, sensitive personal information like social security numbers can be acquired. Be vigilant and spot if any in mail statements you have subscribed to fail to arrive.
Tax Identity Theft
Fraudsters file tax returns using your personal details and then keep your tax refunds. This type of identity theft has been on the uptick due to the new programs related to COVID-19 such as the direct stimulus check and tax due date extensions.
Senior Identity Theft
Senior citizens are particularly prone to identity theft scams. Scammers get senior citizens to divulge personal information by pretending to call from the IRS or Social Security Administration.
Often their social security numbers are used to create fraudulent profiles and take out lines of credit.
Medical Identity Theft
This occurs when someone poses as you to get medical care in your name. You will get extra charges on medical services you didn’t use or your medical insurance premiums go up inexplicably.
Signs of Identity Theft
These warning signs can be spotted through regularly monitoring your credit report and finances.
- Strange transactions on your debit or credit cards
- Credit card bills and statement fail to come in the mail without you opting into paperless billing
- Your credit score going up or down inexplicably without any different actions on your part
- Unrecognized social security number in your records
- Rejected electronic tax return
- Receiving an unrequested tax transcript
- You’re denied a credit card application or loan with no known reason
- New accounts and credit cards in your name that you didn’t apply for
- Debt collector calls about unknown accounts
- Inaccurate medical records
How To Check If My Identity Has Been Stolen
Here are the signs to look out for if you suspect that you’re a victim of identity theft.
- Check your credit card bill and bank account statements often and report any discrepancies immediately no matter how small.
- Run your credit report or register for a credit monitoring service that can do it for you. Data breaches may affect your credit score.
- Monitor your finances closely can help you spot trial transactions by identity thieves
- Use trusted data leak check tools like HIBP or the one by Cybernews to verify if your email address, phone number, and domains have been in data breaches.
Here’s some more information on how to detect identity theft.
What To Do If Your Identity Is Stolen
- The first step is to report the instance of identity theft immediately to the relevant organizations such as your bank or credit card issuer. Have them cancel the cards and issue new ones. Most importantly, freeze your credit with the credit bureaus to make sure more damage can’t be done.
- Change account details associated with the cards such as usernames, pins, and passwords.
- File a police report and check out FTC’s identity theft site to report the identity theft and get a recovery plan.
- Regularly review your credit report. US citizens are entitled to one free credit report per year.
- Request the removal of the fraudulent activity from your credit report. You can also dispute
- Set up a fraud alert that has multiple-factor authentication before processing a new application. You can also freeze your credit which will bar any new applications. It will make credit applications more complicated for you but is well worth the hassle.
How To Protect Yourself From Identity Theft
It’s better to be proactive rather than waiting to mop up the mess after a data breach or identity theft attack. Here are safety measures you can apply:
- Use strong passwords with two-factor authentication or sign up for secure password managers like 1Password.
- Never share personal information over the phone since legitimate organizations will never call to ask you for these details
- Only use trusted WiFi networks especially when banking or shopping online.
- Check your credit report regularly and monitor your finances for discrepancies
- Keep your social security card in a secure place, never in your wallet.
- Review healthcare and insurance notices for any suspicious activity or dates that don’t add up
- Protect your mail by shredding any personal information. Monitor your mail to make sure no notices or bills are missing.
- Be mindful of anyone looking over your shoulder as you enter sensitive information.
The best way to combat identity theft is a combination of robust passwords and caution in your online transactions. Constantly monitor your credit report, your finances, and insurance notices to catch the fraud early.
How Does Mortgage Interest Work?
Mortgage interest rates are a crucial determinant of whether a renter takes the leap into homeownership. Lenders will typically finance up to 80% of the buying price. It is important to understand how mortgage interest works and what goes into your monthly mortgage payments before you sign up.
The total monthly amount that you pay may have other payments tacked onto it such as:
A fixed-rate mortgage is one where the interest rate is locked for the entire repayment period. Your monthly repayments are also fixed throughout.
This type of loan typically has a long lifespan of 30 years. Shorter repayment periods of 10, 15, or 20 years are available at a lower interest percentage but higher monthly repayments.
Example: A $300,000 mortgage for 30 years at an annual interest rate of 3.42% following a 20% downpayment breaks down as follows:
- Monthly repayment for 30 years (360 months) – $1,577.85
- Total mortgage size (principal) – $240,000
- Total mortgage interest – $144,126.57
- The monthly $1,577.85 = $ 1,067.02 (principal & interest) + $ 400.00 (property tax) + $ 110.83 (Homeowners Insurance)
In the beginning, about 75% of your loan repayment is applied to the interest while 25% goes to the principal. As your interest accrued diminishes, more and more of your monthly fee is applied to the principal loan amount. This is called building equity.
Eventually, by your last payments, the whole monthly fee will be applied to paying off the principal.
A mortgage calculator can help paint a financial picture for you for the coming years.
One financial tip for decreasing your interest rates over time is to apply lump-sum payments to the principal of the mortgage loan. A smaller principal equals less interest.
Think end-of-year bonuses, tax refunds, and other auxiliary money coming in. Or you can add the lump sum to your monthly savings budget. If you need help saving money, here’s a short beginner’s guide on how to save money.
The primary benefit of fixed-rate mortgages is predictability. You know how much you will pay monthly for the next 30 years. You’re protected from interest rate fluctuations.
Longer repayment periods allow you to have the lowest monthly payments but cost more overall because you pay more interest.
Shorter payment periods have lower interest rates but the monthly burden on your budget is much higher.
In this type of loan, the interest rate is variable. The lender will usually start you off on an initial interest rate that is lower than that of a comparable fixed-rate loan.
As the repayment period progresses, the interest rate slowly increases. If left long enough, the interest rate may eventually surpass that of fixed-rate loans.
Some of the considerations and terms to keep in mind for adjustable-rate mortgages (ARM) are:
- Adjustment Frequency is the period between interest rate increments and is usually pre-arranged.
- Adjustment Indexes are the benchmark on which your interest rate adjustment is based. The benchmark could be the treasury bill interest rate.
- Margin is the amount above the adjustment index you agree to pay for your mortgage interest rate.
- Caps refer to the limit on how much the adjustment is raised per period. In the case of a negatively amortizing loan, it is a cap on your total monthly payment.
- Ceiling is the highest amount your interest rate is allowed to reach during the lifetime of the loan.
Please note that in the case of negatively amortizing loans, the cap only applies to a portion of the interest. If the interest is left to accrue, it becomes a part of the principal resulting in a higher owed sum than what was borrowed.
Example: A 5/1 hybrid ARM starts with a five-year period on a fixed interest rate. Thereafter, the interest rate rises according to the capped limit per period until you finish paying off the loan or the interest rate reaches the ceiling. Here is a breakdown:
- A $200,000 loan for 30 years will be charged at 4% for the first five years
- Monthly repayment for the first 60 months is $955
- The next 12 months’ rate goes up by 0.25% to $980 then $1055 in the following year and so on.
- These amounts don’t include insurance and taxes.
The main benefits of ARMs are:
- They are cheaper than fixed-rate loans in the short term up to seven years.
- The borrower can qualify for a bigger loan due to lower initial payments
- In a falling-interest market, the borrower enjoys lower interests and repayments without refinancing the mortgage
The major downside of ARMs is the fluctuating monthly payment which can be a significant burden for large loans or if the interest rate doubles.
Interest-Only Loans and Jumbo Mortgage Loans
These third and fourth loan options are mainly geared towards wealthy homeowners.
Interest-only loans allow your monthly payments to be applied only to the interest for the first few years. The monthly payments will be lower but you will not be building equity. This type of loan is best for the homeowner who expects to sell soon and move on.
Jumbo mortgage loans are those where the loan amount is higher than the conforming loan limit set by the Federal Housing Finance Agency. The US national baseline in 2021 is $548,250. In certain parts like New York, San Francisco, Hawaii, and Alaska, the limit goes up by 150%.
Jumbo mortgages can be fixed-rate, adjustable-rate, or interest-only. In all cases, the interest rates tend to be higher.
Even with a great interest rate, other costs associated with being a homeowner can bump up your monthly repayment.
Real-estate taxes and homeowner’s insurance are sometimes included by lenders in the mortgage payment. The money is held in escrow for the lender to pay the bills as they arise.
Homeowner’s Association (HOA) fees can also be quite steep depending on the property location and type.
The type of mortgage you choose depends on how much you can pay monthly and how long you intend to live in the house. The interest rate forecast trends matter and whether you have sufficient cushion to finance ARMs.
Your main aim is to get an interest rate that is great for your pocket and will bring you closer to your financial goal of being a homeowner. Interest rates are determined based on the interest rate set by the Fed and your credit score. See how your credit score can affect your interest rates!
How You Hurt Credit Score
Most people have a general idea of how good their credit is. If you pay your bills, don’t borrow too much, and keep a good mix of credit, you’ll probably have very good credit… right? Get to know how you hurt credit score.
Well, not necessarily. There are ways that we inadvertently harm our own credit without even realizing it. Here are 5 things that could be hurting your credit, even if you’re not aware of them.
You haven’t checked your credit report recently.
Your credit report will tell you all of the information that lenders use to determine your creditworthiness and your credit scores. (As a matter of fact, you actually have multiple credit scores all used for different purposes). The information that they need to know in order to decide whether or not to lend to you is all in your credit report. If you don’t know what’s on your credit report, then you’re left in the dark. You don’t know if you owe something that you forgot about or if there’s a mistake on your report that’s causing you problems.
Many Americans don’t know how they can check their credit report, or if it costs money. Normally, getting access to your credit report will cost some money; however, the US government has made it so that anyone can check their full credit report once a year, from each of the three credit bureaus (Equifax, Experian, and TransUnion), completely free. In order to access your credit report, go to https://annualcreditreport.com (an official US government site) and follow the instructions.
By checking your credit report, you’ll know what items are on there that could be hurting your credit score. Some of those items might be fraudulent, or they might be on your report by mistake. If you find items on your credit report that shouldn’t be there, you can dispute them by contacting the credit bureau that issued your credit report. Finding and eliminating these items is an important part of what credit repair companies like The Credit Pros do.
You never closed that phone plan, cable plan, utilities plan, or some other account.
Many telecommunications and energy companies make it very difficult to cancel your subscription, which can cause undue payments to make it to your credit report. Not only that, but sometimes we forget to cancel our subscriptions before we move. As a result, we end up getting bills sent to our old address and we never see them.
Since payment history is an important part of determining your creditworthiness, some of these contracts will be reflected on your credit report. If you miss a payment and the debt becomes past due, goes into default, or goes into collections, this information will be reflected on your credit report and your credit score will be dinged.
You might have no idea if you still have these debts, and the only way to know is to check your credit report. Unfortunately, much of the damage would have already been done, however by settling the debt (preferably with a lump sum payment) you can see that item disappear from your credit report after seven years. You may also be able to arrange something with the company where they agree to get that item removed from your credit report, however this is up to the company’s discretion.
You’re not receiving statements from ALL your credit cards (even the ones that you’re sure should have a $0 balance)
Similarly to the situation above, many people don’t receive credit card statements from all their cards. The average American has 3 credit cards, and many Americans have more than three. However, there’s rarely a reason to use all of those cards, so you may be only using one and keeping the others open.
While keeping your credit accounts open is generally a good idea (and you don’t need to have a physical credit card for these accounts in order to do so), you want to make sure that you continue to receive statements for these cards. This is because, in simple terms, stuff happens. A fraudster may get a hold of one of those credit card numbers and start buying things online. Or, you may have made a purchase long ago that you had forgotten. Or, interest charges that accrued later may have stayed on the card. Whatever the case, you need to know whether or not you actually owe anything on ALL the credit accounts you have!
Your credit card balance is too high, even if you’re making payments toward it.
One aspect of your credit score is your credit utilization ratio, which is the ratio of credit used over credit available. What does this mean? Let’s say you have a $10,000 limit credit card and your balance is $3,000. This means you have a credit utilization ratio of 30%.
A credit utilization ratio of over 35% is generally considered a negative, as it means you’re using a large chunk of your available credit at one time. Even if you’re making all your payments on time, a high credit utilization ratio could harm your credit score over time.
We recommend asking for a credit limit increase and setting a limit on spending with your bank or credit card provider. This way, you can guarantee that your credit utilization ratio never goes too high.
You avoid using credit cards or borrowing money because you’re concerned about debt.
This one is less about hurting your credit, and more about preventing your ability to build credit. However, the hard truth about credit is that bad credit is BETTER than no credit. There is no credit score that is so low that you’d be better off by having no credit history whatsoever.
There are Americans who swear off the use of credit cards and debt entirely in order to avoid potential problems with debt. This is a fine approach if you never intend on buying a home with a mortgage, or securing an apartment for rent in some places, or getting a job that requires a credit check. However, what’s more common is that there are Americans who use credit very sparingly and, as a result, they don’t have enough of a credit history to use debt that could potentially improve their standard of living, secure a business loan, or give them access to leveraged investments such as real estate.
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