The Numerous Credit Issues Students Can Face

Millions of people who are still in college may use credit for any number of reasons, but might not have the kind of lengthy borrowing history that allows them to handle their various accounts as well as they may like. As such, there may be some classic credit blunders students make that other consumers have already learned to avoid.

Again, the reason that students and other young adults might run afoul of lenders or see their credit rating diminished is that, in many cases, they might simply not know how best to handle their accounts. The longer one has credit, the more one generally understands about how to deal with each account that may be in their name, and that can significantly reduce the number of mistakes made.

What errors might be most common
For many college kids, the first kind of account they get in their names might be student loans, but while these can establish a borrowing history, they’re not always the best training wheels for dealing with credit responsibly because they typically do not come due until after one graduates. Instead, many young adults’ first real experience with handling borrowing in their everyday life comes through a credit card, and misusing it can seriously imperil one’s good credit score.

One particularly common mistake for many young adults when dealing with their first credit card is that they spend too much on it, and pay too little back. This can be a major issue because 30 percent of a credit score is made up of what is known as a person’s “debt utilization ratio.” Basically what that means is the amount someone is borrowing at any one time versus what the total combined limits of all their cards are, expressed as a percentage. So students whose credit cards come with a $5,000 limit can borrow up to that much, but it’s generally recommended that they try to keep the amount they borrow to about 30 percent of that amount, or less. The closer to zero their balance is, the better this portion of their score will be.

Another problem that can arise as a result of having too much debt is that monthly payments can grow so large that a student can’t even afford to meet the minimum payment requirements. In these cases, they might have to skip a month or two on their bills, but this is a bad idea because another 35 percent of a score is based solely on a borrower’s ability to make all payments on time and in full. Even one missed deadline can set a borrower back significantly, and also lead to penalty rates and fees that can make it even more difficult to deal with debt.

Other potential issues
Of course, credit cards aren’t the only type of financing to which students might have access. For those who drive regularly, they might also have to worry about paying down a car loan every month, which can only make it more difficult to keep up with credit card bills when they grow. However, having auto financing will also improve an area of a borrower’s credit score known as “credit mix,” which makes up 15 percent of the rating. The more different account types one has, the more lenders will favor them because they believe it shows a greater amount of responsibility to be able to juggle that many lines of credit.

But again, the biggest credit consideration many young adults will likely face in their early days of borrowing are their student loans, which typically come due within a few months of graduation. The problem with these loans is that in many cases, they can total tens of thousands of dollars or more, and can be extremely difficult to pay off as responsibly as one might like. As such, it might be a good idea to try to come up with a comprehensive plan to make sure that when a borrower has to start paying these bills after graduation, they can do so in a way that doesn’t lead to their falling behind on any other obligations.

This will help to ensure their overall credit health going forward, which may be vital to young adults because taking the time to repair credit can be a lengthy process, and lower credit scores generally lead to more denials of loan applications, and higher borrowing costs even if such a request is approved.

College students who are concerned about their credit standing may also want to take the time to order copies of their credit reports, as doing so may help them spot any unfair markings that may appear on the document. If any such entries are discovered, working with a credit repair law firm may help to clear up the issues.