A free credit report is available annually through www.annualcreditreport.com.
By Jennifer M. Ytuarte
A credit score is based on a person’s credit history, and three agencies measure it: Experian, TransUnion and Equifax.
These agencies record everything from student loans to the purchase of a car, credit cards and limits, balances and payment punctuality, as well as child support and bankruptcy proceedings, said Val Calvert, chair of business, computer technology and criminal justice.
A person’s credit score affects the types of and eligibility for loans and the interest rate charged on large credit purchases, she said.
“Let’s say a student has a credit score of 450; that is very low,” she said. “Chances are if you buy a car, you will not get a good interest rate — the dealer is going to find you a loan, but it may be at 21 percent instead of 8 or 9 percent.”
Credit score ratings are as follows: 760-850 is excellent, 700-759 is very good, 660-699 is good, 620-659 is not good, 580-619 is poor, and 500-579 is very poor.
An annual percentage rate, or APR, allows applicants to evaluate the cost of the loan in terms of a percentage. If a loan has a 10 percent rate, $10 per $100 borrowed is paid each year of the loan.
With a car note, interest is calculated monthly based on the remaining balance.
For example, a vehicle purchased for $10,000, paid over five years at 9 percent APR accrues $2,455.01 in interest, versus $6,103.85 at 21 percent.
Interest accrued at 9 percent APR is as follows: Year 1 $832.69, Year 2 $677.15, Year 3 $506.99, Year 4 $320.88, and Year 5 $117.30.
By comparison, interest accrued at 21 percent APR is more than double each year: Year 1 $1,982.97, Year 2 $1,562.39, Year 3 $1,330.46, Year 4 $887.03, and Year 5 $341.
“Credit in this country is like your health; if you have good credit, you can do anything,” said business management Professor Mahmud Yusuf.
Yusuf teaches BUSI 1307, Personal Finance, at this college. He said students do not follow the same model as their parents.
“A generation ago, when people wanted to buy something, they saved up for the purchase and paid cash,” Yusuf said.
Now, everyone is working to buy the next best thing, and swimming in debt, he said.
“They assume they will be able to work tomorrow so they borrow against next week, instead of saving and using credit wisely by keeping their total debt less than 30 percent of earnings,” Yusuf said.
In May 2009, President Barack Obama signed the Credit Card Accountability Responsibility and Disclosure Act, which requires credit card companies to give warnings to their members before increasing a cardholder’s annual percentage rate.
It also regulates fees and requires a credit card statement to show the current balance and how long it would take the user to pay off that balance if they paid only the minimum monthly payment.
Calvert said, “Department stores offer a discount if you apply for their card during checkout, but if you look at the fine print, their interest rates can be up to 28 percent.”
There are few people who pay off their credit card balances at the end of the month, she said.
“It will say, ‘Based on the minimum payment, you will pay X amount and pay it off in 15 years,’ and then it shows how much interest you paid,” she said. “Who wants to be responsible for a dress that you bought that has probably dry-rotted by now — 15 years later. Why are you still paying for it?”
She said there has to be a reliable credit history with on-time payments and low credit balances to help a bank see the student as a dependable customer instead of a credit risk.
“If you have a history of never going over 33 percent to half of your available credit, that can affect you in a positive way,” Calvert said. “Never buy more than you can afford.”
“We get in trouble when we shop when we shouldn’t be shopping,” she said.
If a cardholder cannot pay off the balance each month, Calvert said to then make payments on time.
“Every statement you get has a due date,” she said. “Late payments incur fees and can also change your monthly APR.”
She said late fees raise a cardholder’s balance and can affect their income to credit ratio, which will change the loans and interest rate that applicant is eligible for.
“You should not have more than 28 percent of your income going to personal debt.”
CREDIT REPORTS AND ERRORS
Negative items will stay on your credit report for seven years, Calvert said.
She said students can order a free credit report annually from www.annualcreditreport.com.
If a student sees an error on the credit report, a charge that is not theirs or belongs to a spouse or family member, they should first contact the company that submitted the bill or issued the charge, and see if it can be removed.
If it cannot be resolved, Calvert said the student should write to the credit bureau with a copy of the dispute letter to work with them.
She said collections debt will stay on the report, but it will show “paying on time,” “paying as agreed” and “settled” if there is a negotiated payment plan.
Calvert said the charges will not disappear, but if paid consistently for six months, they show a “good faith effort.”
“Anything can be corrected, but it takes time,” Calvert said.
Yusuf said good credit goes a long way in helping students to reach milestones throughout their lives.
“If you think about everything you do for the rest of your life, it comes down to finance and credit ratings,” he said. “You buy a house, a car — if you want a high-profile job — they all check your credit score as part of the application process.