Putting credit scores to work
Apartments, first cars, and college — these are big financial milestones on the horizon for our high school students. In the near future, they’ll apply for installment loans, credit cards, and other kinds of financing. They’ll take whatever they’ve learned about financial responsibility, applying it to their lives for better or for worse. But the world of credit, budgeting, and finances doesn’t have to be “sink or swim” for emerging adults. We can help students succeed financially by discussing the following facts about credit scores, practical ways to build credit, as well as what impacts credit score the most.
What makes up a credit score?
We can lay the foundation by comparing a credit score to the grade on your credit report, but instead of a letter grade like A or F it is numerical and can range from 300 to 850. Let students know that their credit report shows their capacity for financial responsibility by listing payment history, credit applications, debt collections, and public records. If someone has a history of consistently paying bills on time then they will have a good grade, or a credit score of 670 or higher. If another person occasionally made late payments they may have a fair score between 580 and 669 or so. Consistently paying behind schedule will result in a poor grade, or a credit score lower than 580. Usually, a low credit score costs you money in the long run as you are subjected to higher interest rates, forced to pay large deposits on utilities, and you can even be denied financing.
- Quick Tip 1: Wondering how students can find their credit score? They can obtain a copy of your credit report from each of the three major credit bureaus: Equifax, Experian, and Transunion. Simply go to their website and complete their information.
- Quick Tip 2: Looking for a ready-made lesson that will introduce this? Download this free lesson plan on credit, with videos, articles, and discussion questions to introduce the concepts of credit and debt.
Do students know the 3 simple ways to start building credit?
Obtain a secured card. It can feel like a catch 22 trying to build credit when you have no established history and most banks are hesitant to help you get started. A credit card secured to your savings account protects the bank while allowing you to prove that you will make timely payments and keep your balance low. This is a great option not only if you have no credit history yet but also if you’ve had some collections or missed payments and are trying to improve your credit.
Get a co-signer. A co-signer can help you qualify for a loan that you might not otherwise be able to obtain on your own. Having an additional person accept responsibility for paying the loan gives the bank more security. Meanwhile, each payment you make will appear on your credit report, and if payments are on time you will start to see that reflected in your credit score. It may help to remind students that any loan is a financial responsibility that they do not want to take lightly. If a guardian is hesitant to be a co-signer, it may be a good opportunity to discuss better options.
Become an authorized user. A person with well-established credit, like a parent or other close family member, can add you as an authorized user on their credit card account. Both users are responsible for payments and, like with a co-signer, the credit reports for both users will reflect the payment history. Again, this is a great opportunity to discuss with students what this responsibility means.
Does your class know exactly what impacts their credit?
Payment history plays a huge role. Nothing can substitute a long, consistent history of timely payments and responsible credit management. A late payment every once in awhile won’t destroy your credit, but be careful not to let it happen regularly or let any debt go to a collection agency. If possible, pay your balance off every month. This is a great opportunity to discuss best practices for spending on credits based on monthly income.
Consider how much credit they’re using. If someone is maxing out their credit cards, that will drive their credit score down. However, a best practice is using only about 30% of available credit — this will drive a credit score up. For that reason, you want may to let students know to avoid closing down old credit card accounts that they no longer use. It looks good to banks when you have credit available to you even if you don’t access it.
- Elementary Extension Lesson Ideas: For younger students, start the conversation early by having them go through the online lessons and games in EVERFI’s Vault: Understanding Money.
- Middle School Quick Tip: For middle school aged students, help lay the foundation early about credit and debt by having them go through Lessons 3: Ways to Pay in EVERFI’s FutureSmart course.
- High School Quick Tip: Give high school students a safe, risk-free environment to practice by having them log into EVERFI: Financial Literacy for High School and apply these concepts in the online lesson #5, Managing Credit and Debt.
High school students of today are preparing for their first big, milestone purchases. Our students will begin a credit trail that will follow them through personal loans, insurance policies, and mortgages; forever affecting their interest rates, ability to be approved for financing, and even employability. That’s why now — before the milestones — is the time to show our students that financial literacy is so much more than knowing how to write a check. Teaching the ABC’s of credit now will help our students succeed in responsible financial management tomorrow.
Jennifer Fahey has been a creative writer and blogger for over ten years. She’s recently had the pleasure of teaching preschool through elementary age children as well as providing administrative support to a humanitarian organization while working in Eastern Europe. Jennifer, along with her husband and their three children, are now happy to be settled back in their home of Boston, Massachusetts.