College Student Series: Why is Credit Important?

We have decided to write some articles around finance and travel for college-age individuals with little to no credit history. Because traveling using points requires a healthy understanding of financial information and how to budget, this series of articles will address how to LEARN the best and safest ways to start a credit history. Our passion in life is to help others through teaching, and we firmly believe that high schoolers and college students need to be more educated in the areas of finance. Please read the information below carefully, and really slow down instead of skimming, because every piece builds on the next. Look for an article in this series over the next few Sunday afternoons.

Let’s start with the “why” as it relates to building credit. So many college students are scared to get involved in starting a credit history because they simply don’t understand why it’s important. We can’t emphasize enough that college is the perfect time to start a simple credit history, mainly because you aren’t making enough money to buy lavish things anyway, and you are used to living and eating cheaply! Plus, when you graduate you don’t want to be starting from square one.

Separate From Mom and Dad

Your parents are likely vital to your financial stability through your college years, but when you graduate, you don’t want to keep leaning on them for money, or at least I hope you don’t! Unless you plan on moving back in with them for a long period of time and living in the bedroom you were sleeping in at age 4, it is essential that you start building a credit history in college.

Compare these two scenarios:

1. Individual A gets a form of credit when he turns 19 and is in his freshman year of college. By the team he graduates and gets a job at age 23, he has four solid years of credit history, so he was able to lease an apartment right away. He decided to cut costs by getting a two-bedroom apartment with his college buddy, and he didn’t even need his parents to co-sign the lease!

2. Individual B knew he wanted to get started with building a credit history, but no one ever explained it to him in a way that he understood, so it all made him a little uneasy. He was an excellent student and got a great job right out of college, but he had to get his parents to co-sign on his first credit card, his new car, and his apartment. Individual B is making good money, but he doesn’t understand why all of his big purchases require the financial backing of his parents.

If this isn’t reason enough to light the fire in you for learning more about credit, then see if these points below do the trick.

Lower Interest Rates

I know that all high school classes that teach anything about money will constantly tell you to never take out loans, never use credit cards because they are evil, and never buy a car unless you can pay for it with cash. Well wouldn’t that be just wonderful!!!???

Any realistic person would tell you that a college graduate at age 23 while working a new job is almost 100% likely to need to take out a loan. If your parents are going to fork over money to you so that you don’t have to get a loan, then I ask how long you want that to keep happening before you get financially independent? I still have friends at age 32 that regularly receive money from parents because they haven’t become independent yet.

A probable scenario is that your 15 year old car breaks down and fixing the problem will cost more than the car is worth. You decide to get a decent used car for $8,000, but because you just started your new job 6 months ago, you only have $2,000 saved. What do you do? Not get a car and quit your job? Of course not!

You either call mom and dad, or you use the $2,000 for a down payment and finance the other $6,000 and pay it off over 2 years (the quicker the better). Someone with excellent credit and a strong credit history might get an interest rate at or below 1%. Someone with no credit history will either need a co-signer, a larger downpayment, or an interest rate at 4-5%. (One of my friends actually got quoted a rate of 8% because of his bad credit history.)

The difference between the two interest rates on that car purchase is hundreds of dollars. That is money you could have saved for a vacation, but instead you are paying it to the bank because of getting a late start on credit history.

Credit Card Rewards

So you graduated college and have a significant other. You both decide to take a summer trip to the beach, but since your job is paying a starting-level salary, you have no idea how you can afford to pay for the trip. Since you are trying to stay afloat financially, you don’t go! Good decision!

You get engaged to that special person and decide on a wedding date in the spring. You both want to take a special Christmas trip to celebrate before the wedding. But you can’t afford it with the wedding coming up, so you don’t go again…

After getting married you have bought a house together, but her parents had to co-sign on the house, and her dad actually gave you $15,000 to use for the downpayment. 2 years pass with no real vacations other than going to the park for a picnic or taking a trip with the in-laws. You were making the right financial decisions by saving the money, right?

Now you’ve been married 3 years and it’s time to start talking about having kids….. When will we ever get the money to take a vacation without tagging along with parents????

Answer: Credit Card Rewards

With a strong credit history and always paying your bills each month, you could have applied for a good travel rewards card as soon as you got hired out of college! That means you could have been taking a vacation every year for free just by using a credit card to pay for your monthly expenses. I know it sounds too good to be true, but if you don’t believe it, look at the rest of the articles on this website.

So many people live the story above, but we have been able to travel to places we NEVER thought we could for free, all before age 30 while both working as teachers.

I know this is a lot to digest, so this is the end of the college student series for this week. If we have spoken to you AT ALL, please read the subsequent articles coming out the next few Sunday afternoons. We will explain how to safely build credit, which credit cards to get, and more.

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