The Financial Aid Office considers Financial Literacy a critical aspect of a student's life at Otis. Issues such as budgeting, credit history, savings and general costs are stressors in a student's life. Our goal is to educate and empower students to have a handle on their financial well-being.
The Financial Aid Office have partnered with The National Endowment for Financial Education (NEFE) for Financial Literacy for young people. They have provided a site full of articles, calculator and tips on improving your money management skills. The site is http://cashcourse.org/otis/.
Credit Report - Official Federal Site for your FREE annual credit report
Building Your Credit History
Responsibly building credit is something young people should think about and discuss. Credit is a big responsibility with long term consequences.
It is important to understand the inner workings of your credit history. Creditors judge you based on your credit history. Another set of people who can look at your credit in the future is prospective employers. The long term effects of bad decisions regarding your credit can last seven years. It's a long term commitment.
Evaluate your current credit history
You may not think you have credit but you should still take a look at your credit history with all three credit bureaus to establish a baseline. The only federally approved site is: www.annualcreditreport.com. This will also assure you that you are not a victim of identity theft.
Keep electronic copies of your credit history in a secure place. An example would be to print it out as a pdf and keep them where you keep your tax information. It's important to keep this for future reference and also if anything is incorrectly inputted then you have a copy for proof.
Build your savings and checking
Before even thinking of getting credit, your ability to pay and hold yourself to a budget is crucial. So having a savings and checking account can help you track your expenses and gives you the ability to automatically deduct payments from your savings or checking. This will prevent you from having late payments.
Understand the card you want
You want a card that will last you a very long time. It was common practice in the past to get rid of a credit card if you find better deals but this process puts an inquiry on your credit. Since you are just starting your credit, the inquiry hurts your credit much more than that of someone who has established credit.
Store cards used to be a popular way to build credit but the long term aspect of a card and the transient nature of the student and workforce is not conducive to a store card.
Stick with the big bank brands and make sure that you understand your rate, fees and credit limits.
A Credit Score ranges from 300 to 850. Above 750 is considered by some creditors as a good credit score. Keep in mind that you may have a different credit score for each credit bureau.
It is important to be selective regarding who and how many times your credit is checked by a creditor. Every time your credit is checked by a creditor, you have an inquiry on your record that lasts two years. While one or two inquiries are not entirely bad on your credit, several of them within a year can hurt a credit history that has little on it. Seeking new credit is considered a hard inquiry and a promotional mailing is considered a soft inquiry.
Credit Limits: 20% rule
There is an assumption that if a creditor gives you a credit limit of $500 then you can spend up to that amount and your credit will be fine. In reality, spending close to the limit hurts your credit because you are near the max. To retain a good credit score, spend no more than 20%: in the $500 example that is only $100.
Ability to Negotiate
Once you have established good credit for more than a year, call your creditor to lower your interest and increase your limits. Calling your creditor and being proactive regarding your credit keeps you aware of your score and limit. More importantly, you are starting to gain higher limits and save more money by having a lower rate should you carry your balance over.
Faster Way to Gain Credit
Building established credit typically requires a two to three years of good and responsible credit use. However, there will be situations in which you might need to establish your credit within a few months instead of years. This process takes a few months to complete, so please give yourself plenty of time.
The following process is one of the better ways to immediately establish credit. This does not guarantee approval on a private loan. The basic concept is to piggyback on someone's good credit card.
You need someone with good credit on a credit card that:
- they have had for longer than five years
- has a credit limit higher than approximately $5,000
- has never been late with payments
- has a current balance no more than 20% of the card limit
- reports to all three credit bureaus
Ask this person to add you as a "joint account holder". The terminology is important because you could be added as an "authorized user" and it will not improve your credit since it will not be counted on your credit score. After being added as a joint account holder you will need to know when the creditor reports to the credit bureaus so that you know when your credit is affected.