When he graduated from college, Jared Callais, now 25, was financially free, unburdened by the weight of student loans and credit-card debt.
But when Callais decided the time was right to begin building his credit and started trying to open accounts, creditors balked at his clean track record.
Eventually, Callais’ wife, Bre, added his name to one of her cards, and after a few months, he was able to successfully apply for his own credit account. At the time, however, he said it felt like he was caught in a financial Catch-22.
“It was kind of frustrating,” Callais said. “You can’t get any credit because you don’t have any; but you don’t have any because you can’t get any. It’s like, ‘How in the world do you start if nobody’s going to let you?'”
Callais’ lack of credit-card debt after college puts him in the minority of college-age credit users, who are increasingly turning to their credit cards to pay expenses, according to a 2009 study of undergraduates’ credit usage trends by Sallie Mae, the saving, planning and paying for college company.
According to the study, 84 percent of undergraduates had at least one credit card. Only 15 percent of freshmen had no balance on their cards, but seniors were graduating with an average balance of $4,100, a 41 percent increase over 2004.
Lorin Jones said he used his credit cards extensively when he was a student at Middle Tennessee State University from 2005-2007. Between work and school, he was barely scraping by and said he relied too much on a credit card he secured for a one-month trip to Europe in 2005.
Like about three-quarters of college students in the Sallie Mae study, Jones incurred interest charges by carrying a monthly balance. That balance wasn’t very high, but because many credit cards issued to younger users carry a much higher annual percentage rate the interest payments put him in a financially untenable situation.
1. Ask a family member to add you to a credit card account as a joint account holder. You’ll benefit from that person’s good credit as he or she consistently makes payments.2. Consider a secured card when no one will offer you unsecured credit. These cards are available at many credit unions and require a cash deposit. The deposit is released after a certain period of time if payments are made consistently.3. Budget your credit-card use. Credit cards for those with poor credit usually carry higher interest rates, so use them to pay for regular monthly expenses such as groceries, gas or utilities you already budget for.4. Watch the calendar. Prompt payments of rent, utility and cell-phone bills are not reported to crediting agencies, but missed payments are, which negatively affects credit scores.5. Try to stay under 30 percent of your credit limit for a given account. Any higher sends up warning flags to other creditors.SCORE BREAKDOWNYour credit score, typically in a numerical range of 300-850 (the higher the better), is determined by a number of factors. Here’s a breakdown of what credit tracking agencies take into account.* Payment history (35 percent): Do you always pay your bills on time?* Outstanding debt (30 percent): How close are you to your credit limits?* Term of credit (15 percent): How long have you had credit?* Types of credit (10 percent): Do you have credit from several sources, such as personal loans, car loans and credit cards?* New credit (10 percent): Are you making or authorizing multiple inquiries into new credit lines (i.e. shopping for credit)? This can ding your credit score.Source: Gideon Thomas, Consumer Credit Counseling Service business manager and education specialist.
“It’s a heinous thing that can get on top of you real quick,” Jones said. “I was like, ‘What am I doing? The money I’m paying every month is so this doesn’t explode all over me.’ For two years, I was making no progress.”
Eventually, Jones turned to his parents for help. The experience, while embarrassing, instilled in him an understanding of the dangers of credit cards, though he still uses one as long as he is sure he can pay off the balance by the first statement.
Whether a young creditor has bad credit or no credit adds up to the same problem for most creditors, said Gideon Thomas, 29, a business manager and educational specialist with Consumer Credit Counseling Service.
“They both can hurt you just as bad,” she said. “Most of the time, when you want something, you can’t get it. And if you can get it, you pay double or triple or quadruple for what you’re trying to get.”
As he begins his college studies, University of Tennessee at Chattanooga freshman Zachary Freeman said he developed a healthy fear of credit cards thanks to his parents’ struggles with debt they incurred as newlyweds.
Freeman, 18, who recently published “Free Money Please,” a guide to securing financial aid for college, said he learned from their experience. Despite using his credit card for most of his college expenses, he never carries over a balance, something only 17 percent of students in the Sallie Mae study reported doing.
“It’s a very dangerous trap to fall into, being as young as we are and not understanding what goes on in the financial world,” he said. “I don’t think our generation understands exactly what credit is.”
Several factors go into establishing a person’s credit score (see related box), which is how creditors judge a person’s credit worthiness.
The most common credit score, called a FICO score, is reported in a numerical range of 300 to 850. The median FICO score is 723.