How Your Bad Credit Score Affects Your Teen
Think your bad credit only affects you? It doesn't.
Think your bad credit only affects you? It doesn’t.
In general, every individual possesses a credit score representing the likelihood that he or she will pay back debts. Ranging from 300 to 800, credit scores can be either a blessing or a curse. Great scores can result in increased loan approval and low interest rates. On the flip side, poor credit scores have an opposite effect and may affect not only your financial standings, but your teen’s as well.
The good news is bad credit doesn’t develop overnight. Bad credit develops primarily because of missed payments and a buildup of credit card debt. Generally, about 35 percent of your score is influenced by payment punctuality, and 30 percent is influenced by your amount of debt. The rest of your score is affected by length and types of debt and recently obtained credit. Instances such as car repossession, bankruptcy, apartment eviction and home foreclosure severely and instantly damage your credit score; however, months, even years, of significant financial struggle typically precede such extreme occurrences.
How Bad Credit Affects Your Teen
One important area you may have trouble as a result of poor credit is when your teen applies for college because parents are a major factor for tuition assistance and payment. Some students may need a parent loan called a PLUS loan to afford college. PLUS loans require a credit check, and poor credit scores can prevent you from being approved. Additionally, bad credit scores can make you ineligible to cosign any private college loans your teen may need to acquire lower interest rates.
PLUS loans are federal loans that graduate or professional degree students and parents of dependent undergraduate students can use to help pay education expenses. The U.S. Department of Education makes Direct PLUS Loans to eligible borrowers through schools participating in the Direct Loan Program. source: http://studentaid.ed.gov
Another way a poor credit score can affect your teen is interest rates cars. You may want to buy a car or cosign on a lease for your teen, but bad credit may cause you or your teen to face interest rates of 16 percent or higher as opposed to rates starting as low as 5 percent for good credit scores.
Additional effects include paying more when adding your teen to your car insurance policy and being unable to cosign on an apartment lease for your teen, limiting their options for independent living while at school or after.
Boosting Your Score…Before It’s Too Late!
To start boosting your credit score, your primary focus needs to be improving payment punctuality and decreasing your overall debt. To do this effectively, you may want to create a structured budget, which should help in finding places where you can cut back and control your spending to significantly lower your debt. For example, you may be able to acquire a restructured cell phone plan or obtain a reduced cable plan to save money. By keeping your debt payments steady, you can see your score improve in as little as six to eight weeks.
In addition to improving your own credit score, begin helping your teen build good credit. You may want to consider allowing your teen to obtain a credit card with a low maximum balance, such as $500. If he or she makes payments just above the minimum every month and on time, he or she should have positive credit by the time they start applying for college or car loans. Knowing your teen is on the right track for a stable financial future gives any parent peace-of-mind.
Statistic: 25 percent of Americans suffer from bad credit
Fix It Up
The good news is, bad credit can be repaired and your credit score boosted.
Your primary focus needs to be on improving payment punctuality and decreasing your overall debt. To do this effectively, you may want to create a structured budget, which should help you find places where you can cut back and control your spending. By keeping your debt payments steady, you can see your score improve in as little as six to eight weeks. But sometimes no credit is as damaging as bad credit. To help your teens learn the responsible way to pay down debt and deal with a loan, as well as, establish a credit history, consider a loan program like the Credit Matters Loan offered by Guardian Credit Union. And since every Guardian member is eligible, regardless of their credit score, it can also help parents repair poor credit. Jessica Pigg at Guardian explained how it works. “The Credit Matters Loan is a $1,500 share-pledged loan that you repay over a 12-month period. The loan proceeds are first placed in a restricted savings account, and as you make monthly payments on the loan, funds from the savings account become available for your use,” she said. “You can also choose to keep those funds on deposit and build a great savings plan at the same time. Your successful payment history on your Credit Matters Loan will be reported to the credit bureaus, which can positively impact your credit score.”
PLUS or Minus?
PLUS loans are federal loans that parents of dependent undergraduate students can use to help pay education expenses.
The U.S. Department of Education makes Direct PLUS Loans to eligible borrowers through schools participating in the Direct Loan Program. Just like any loan, PLUS loans require a credit check. But even if you clear the check, several expert sources are warning that the PLUS program may not always be the best choice as it has higher interest rates than a student loan and allows you to borrow large amounts of money, up to the full amount of your teen’s tuition, with little regard to income or other debts. This makes it easy to get in over your head. Also, PLUS loans can’t ever be turned over to your child, meaning you are responsible for the full amount until it is paid off. As with everything, do your homework to see what type of loan is right for you.
Nearly a million parents took out PLUS loans last year. On average, they borrowed $12,000.
Common Credit Myths
Paying your bills on time guarantees a good credit score.
Paying your bills on time accounts for 35 percent of your credit score, but it’s only one piece of the pie. Also watch your card balances. Your card balances in relation to the credit limits can have a significant impact on your score.
Checking my own credit score will hurt my credit score.
Reviewing your own credit report counts as a “soft inquiry” and therefore has no impact. “Hard inquiries,” which source when you apply for credit, can hurt your score if you are excessively shopping for credit.
Closing my unused card will boost my credit score.
This strategy can actually backfire and cause your score to plummet. Closing a credit card closes off the available credit limit associated with the account and can cause a spike in your revolving utilization, which can drastically lower your score.