2011 graduates will average nearly $23,000 in student loan debt; sound money strategies are critical
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Even as many individuals continue to debate the value of a college education, a recent study found that 2011 college graduates will leave school with more debt than ever before at nearly $23,000 per student .
Consumer money expert Virginia Sullivan of Bills.com recommends that students graduating with loan debt be prepared to enact a sensible financial strategy: “Students facing even minimal debt upon leaving school should have a plan in place to effectively manage their credit score and enact a sensible budget and savings strategy to begin their post-college lives. Graduates must understand that a stumble now can hurt their chances of securing credit or prime home and auto loan rates in the future.”
Money Strategies for Grads
Ms. Sullivan outlined three basic money strategies for recent graduates to help them understand the impact of their financial decisions and establish sound money habits.
1. Credit History is Critical: Graduates must consider the impact to their credit score whenever they make a financial decision. Even something as innocent as skipping a light bill one month to afford a nicer Valentine’s Day dinner can lower their credit score and cause them to lose out on a prime interest rate for an auto loan – leading to higher monthly premiums for three or more years. And as more potential employers are reviewing credit scores as part of their hiring process, a bad score can hurt college grads when they apply for jobs.
2. Think Long-Term: Evaluate how decisions made today could have far-reaching economic consequences on income, career, debt, and more. Graduates should make money decisions now through the lens of three, five or ten years in the future. For example, a new car right out of school might be a poor use of graduation money if you have to pay for higher insurance and parking because you live in a city.
3. Saving is Sexy: Graduates should embrace the concept of savings at an early age. Not only is savings chic, but it will also help establish good lifelong habits. With many new online resources and tools for group buying discounts, couponing, and more – it is easier than ever to build simple savings habits. It can even be as simple as considering the lifetime savings value of purchased items, such as using a home water filter versus buying bottled water.
Credit Score Basics
To help graduates understand credit scoring, Ms. Sullivan pointed out that there are three primary factors that make up the bulk of a credit score:
1. Payment History: an on-time payment history can account for approximately one third of a credit score. It is critical to build a prompt payment history – even one late payment can torpedo your score and ruin years of good behavior.
2. Utilization: this means how much of the credit available to you is being used. It's important that you owe a little bit, but not too much, and that it be spread across different types of credit vehicles or even cards. The credit score bureaus want to see that you can use credit responsibly.
3. Length of credit history: credit bureaus want to see that you have a long credit history, and haven't secured a lot of credit recently. If you open up a handful of new cards at one time or a secured line of credit, you'll find that your score likely drops.
Credit Score Tips
Once graduates understand how a credit score is formed, these basic credit score tips from consumer money resource Bills.com can help them build or improve their current credit score.
• Review your credit report for accuracy. Request a free report from www.annualcreditreport.com and then review it to make sure late payments, bank accounts, etc. are all listed properly. Report any inaccuracies to the credit bureau.
• Pay bills on time. Even one late payment can hurt your credit score. It takes only one missed bill to damage your score and years to repair it. Paying on time will maintain a high score now or help rebuild a low score over time.
• Keep balances low for good utilization. The lower the utilization, the better.
• Avoid carrying too many cards. A number of cards or high number of inquiries can reflect badly on your credit score. Carefully research cards and then only apply to those for which you are qualified.
• Keep older credit cards. Credit bureaus want to see long-standing credit, so don’t jettison an old card even if you’re not using it.
• Use your card regularly, even for minimal purchases. A stagnant card could hurt your standing because bureaus want to see responsible activity on your account.
• Take advantage of the credit bureau statement to address a low score. Under the Fair Credit Reporting Act, consumers can add 100 words to their credit bureau file to explain any discrepancies or unique circumstances surrounding their score. A well-written statement could influence a lender who carefully reviews your file.
• Apply for a credit card if you don't have a credit card or payment history, but use it responsibly. Only use a small amount of the credit available, and pay it off in full each month to avoid interest.
• Pay your rent on time. Experian has modified their scoring rules to evaluate on-time rental payments in calculating a score in lieu of actual credit history. This can be very useful for recent grads. Ask your landlord or apartment building manager if they report on-time payments to Experian.