How to Build Your Credit History
July 09, 2009
Student loan debt looms over the heads of many educators"be it a college professor lecturing on the European Renaissance or a kindergarten teacher handing out mats at naptime.
Some new teachers have managed their debt and are unburdened by student loan payments, which in some cases can exceed car expenses or rent costs. Others are slaves to their credit card and loan companies, deferring payments so they can squeak by on low-paying first- and second-year teacher salaries.
"That's the reality check stage," says Gail Cunningham, vice president of public relations for the National Foundation for Credit Counseling. "Where you choose to go to school is a very personal decision. The question you should ask yourself is, "˜Am I going to be able to repay my loan gradually on a teacher's salary?' The economic reality has to weigh in."
Cunningham's son, a professor at Texas A&M University, attended an inexpensive state college in his hometown before going on to get his master's degree from Texas A&M. Through a combination of fellowship grants, student loans and work-study programs, he eventually earned a Ph.D. from Ohio State University.
"Everybody is different," says Cunningham. "One 18-year-old might have very good money habits and another might be chomping at the bit to get out of the house and experience the social side of college life."
Teachers aren't the only college grads that have student loan debt disproportionate to their incomes. Cunningham recalls talking to a 20-something journalism student from Columbia University struggling to make loan payments on an entry-level newspaper salary.
"It's not uncommon for us to see six-figure student loan debt," says Cunningham.
She says the best way to build good credit is to start early. A student can obtain a credit card in his own name when he turns 18. Although credit companies bombard students with offers, Cunningham warns against charging more than you can afford to repay in full when the bill arrives.
"College is a wonderful opportunity to build a positive credit history," says Cunningham. "Likewise, it is also an opportunity that some squander by spending foolishly."
A person's credit score is weighted by five factors"payment history, amount owed, length of credit, whether new or inactive accounts exist and type of credit used (i.e. charge cards, installment loans, mortgage loans, etc.).
The two most heavily weighted factors are payment history and amounts owed. To maintain a good credit history, Cunningham suggests college students and new teachers keep consistent account activity and make triple-digit credit card payments when possible. As with any career, she advises teachers to live off 80 percent of their salary, save 10 percent for retirement and give 10 percent away. Those who are unable to give should allot 10 percent to paying down debt.
The best advice Cunningham can give a new teacher is to participate in her employer's 401K savings plan. If an employer offers to match your weekly or biweekly retirement savings, contribute enough money to meet matching-fund requirements.
"Not doing so is throwing away free money," says Cunningham. "Starting young and staying the course will pay off handsomely. Time is money's best friend."
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COMMENTS
How much did tuition costs and student loan payments impact your choice of college? Is living by the 80/10/10 principle feasible in your life? Why or why not?
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