While the holiday season invites shoppers to take advantage of their credit cards, credit scores may be impacted.
Increased holiday shopping can affect a credit card user’s rating. For students who are working to establish credit, financial experts advise consumers to consider what they can repay before making a purchase.
Finance department chair Mark Peterson said consumers should understand how credit scores are calculated in order to understand the impact extra shopping will have. He said a credit score is determined by how much of a “credit risk” a person poses.
” The one that carries the most weight is the payment history that one has,” he said. “So if you make payments on credit cards … whether you’ve been late, whether you’ve paid off an entire loan, that is the number one factor in the credit score.”
Peterson said situations such as late rent payment factor into this part of the credit score calculation.
“Any time you’re delinquent on paying a bill, the institution that you’re paying the bill to will report that to the credit bureau,” he said. “So you want to make full payment and pay it on time and that will establish good payment history.”
LaCharles Ward, a graduate student in speech communication from Chicago, said he has never made a late payment. He said he uses two cards, a regular credit card and a store credit card. Ward said it made sense to sign up for the retailer’s card because most of his shopping happens at Banana Republic.
While some shoppers are sent a notification letter of credit card approval, Ward said he was approved on the spot because of his good credit score. However, Ward said those who don’t have a job shouldn’t take on a credit card.
“It becomes really taxing … people see the amount of money and they think they can use it all,” he said. “But it’s just the maximum they can spend, not the amount of money they have.”
While paying bills on time can help a credit score, paying them early can boost the score even more.
“I get my payments in weeks before they’re due,” Ward said.
Establishing credit may be limited for students who have struggled to pay bills on time or do not initially qualify for a credit card. However, Stacy Callahan, vice president of lending at SIU Credit Union, said the institution will grant customers a $500 Visa even if they have no credit.
“We start them out and see how they do with the $500 one, and after a year if they’ve maintained it and paid everything on time, we’ll up it to $750 and build from there,” she said.
Callahan said the credit union has seen students come in who want to establish credit for the first time. Although she said it is considered a risk to help someone establish credit, the credit union has found it to be beneficial.
“We do have some losses, but not to where it’s not worth doing it anymore,” she said.
When it comes to loans, Callahan said, a credit score could affect whether a student may be able to take one out after graduating.
“Every time you get a loan or apply for a credit card, that’s how they determine your rate,” she said. “The worse your score, the worse your rate, so the more you pay.”
Callahan said numbers at the credit union show shoppers tend to make late holiday-season payments, but the institution has taken that trend into account.
“Our delinquency is a little higher during December and January, but we have started to offer a skip-a-pay, so if you’re in good standing with us, we’ll let you skip your December or January payment to help with the Christmas holiday,” she said. “But that’s if you’re in good standing, so that’s a reason why you need to keep your credit good.”
While some shoppers may consider the impact of their holiday spending on their credit scores, credit scores are not a concern for others because they have yet to establish any credit.
Peterson said one suggestion for a student to establish credit is to have a good relationship with a bank.
“If you have a long-term relationship with your bank or credit union, you could take out a loan from them, because they know your history if you’ve been a depositor or a member of a credit union for a long period of time,” he said.
Peterson said he co-signed on a credit card when his son in college turned 18 because the credit union would not give him a card without a co-signer.
“Previously, when we would buy a computer for him, I might buy it, or he would pay in cash, but now he buys it using his credit card,” he said. “It seems to make sense for college students to find someone who can co-sign on a credit card and establish credit that way, and make sure the bill is paid on time and in full and it will look pretty good on the credit history.”
According to the Credit Card Act, which was signed into law in May 2009, a person must be 21 to sign up for a credit card unless he or she has a co-signer or can prove they have the money to repay the debt. While students are often warned against signing up for credit cards because of the risk it poses to those who are working to establish a means of income, Peterson said he recommends credit cards to the responsible student.
“I can’t imagine being in college and on my own and not having a credit card,” he said.
Peterson said if a student was in a situation where they needed a car, for example, they would need a credit card to rent one.
“Now, if you misuse it, and you’re buying things you cannot afford and you don’t need, then it’s horrible for you financially to do that,” he said. “But if you’re a disciplined consumer, credit cards are almost a must.”
Peterson said he recommends graduates to work and pay off their bills with the highest financing charges or interest first, and bills should be paid off as early as possible.
“That’s not to say you need to deprive yourself of everything, but use good judgment when you’re purchasing new things and you’re already in debt, because student loans for example have to be paid back,” he said. “You can’t just walk away from them, so it’s going to require some discipline.”
Peterson said he recommends students check their free credit scores every year, which are available through the three major credit bureaus, Equifax, Experian and Transunion.