Kids in college can easily make blunders that lead to very bad credit. Here’s how to help your clients help them.
Over the past few weeks many of your middle-aged clients have packed their kids off to college. Along with the toothbrush and laptop is the hope that the five or six figures invested towards getting their child a degree will be paid back many times over — once they leave school and join the workforce.
Of course, college isn't just about getting a job; going away to school also gives a young adult the chance to become more independent. This freedom is usually manifested in the realization that (sans parental supervision) a dinner of delivered pizza is possible every night of the week.
But a few seemingly small money messes made by a student during these formative years can create headaches for your clients now, and wipe out many of the economic advantages normally associated with a college degree.
Here is why and how parents should make sure that their “adult” children's short-term financial irresponsibility doesn't delay or deny long-term financial security.
What A Difference A Money Mistake Can Make
When the subject of their children's credit capability is broached with parents, some may dismiss the matter as inconsequential — especially relative to the overall costs of putting a kid through college. But the expense of just a couple of money blunders can go far beyond a few dollars in late fees and surcharges, and you might not be able to rectify those blunders for any amount of cash.
First, there's the issue of where the kid will live, both during college and afterwards. Many landlords require a credit check before offering a lease to a prospective tenant. And a negative credit history will one day certainly force the child to pay a higher interest rate on a mortgage — if she can get the loan at all.
Although a home loan may be a few years off for most young adults, a car loan will be a much more urgent matter. Even if it's possible for him or her to borrow enough to get behind the wheel, insurers of all kinds (especially auto) use credit data to determine whom they will cover, and how much the coverage will cost.
Finally, the most critical period in which poor credit can hurt your clients' children is just after college, when the job interviews begin. A survey released last year by the Society of Human Resource Management found that a third of large employers review the credit reports of potential hires.
A black mark here or there may not eliminate your clients' children from consideration for a position, but negative information on the credit report certainly won't improve employment prospects. And the worst-case scenario could stall getting a head start on building a career.
Stopping Credit Card Offers
One method your clients can use to protect a child from youthful financial indiscretion is to block the umpteen credit card solicitations that students are bound to receive by mail. The fastest way to stem this tide of temptation is to call 888-567-8688, or visit www.optoutprescreen.com. The Direct Marketing Association established these avenues to allow users to request removal from marketing lists that make use of information provided by the four largest credit-reporting agencies.
Of course, eliminating credit card offers from flooding a student's mailbox doesn't prevent him from completing an application ripped off a dorm lobby bulletin board, or attached to a t-shirt passed out on the campus mall (it's the t-shirt that's passed out, not the student in the t-shirt). That's why the parents may want to let their kid know that while his professors are marking up his report card, mom and dad will be keeping an eye on his credit report.
Parents can spot serious problems by pulling a copy at www.annualcreditreport.com, a site that provides access to a report from each of the three largest credit bureaus, available free once every 12 months.
Finding And Fixing The FICO Score
But don't think those who would judge your clients' children by the kids' fiscal behavior will comb over credit reports, parsing every payment for adequacy and timeliness. Instead, lenders and employers usually just check the applicant's FICO score — a quantification of the raw information contained in the credit report. The scores range from 300 to 850, with the median score being 723, according to MyFico.com.
FICO scores at MyFico.com will cost your clients $15.95 for each of the three bureaus' scores. And plunking down that amount will bring back not just the actual score, but also a dozen or so pages of supporting data.
Getting access to the kids' FICO scores also creates a great opportunity for your clients to share a “teaching moment” with their children. Once the score is purchased, the site allows users to simulate what some “what ifs” (like paying bills on time, or missing a few payments) will do to the current score.
Freezing Prevents Spoilage
Parents who are beyond the “trust, but verify” stage of dealing with their children's potential debt may want to shut out all borrowing activity by putting a “credit freeze” on the kids' reports. Although this option is only available in about two-thirds of the 50 states, putting a freeze in place means your clients' children can't take on any new debt without “thawing” the report — an act that usually requires written instruction, a small fee and a few days' wait.
That's a small price to pay for the advantages offered. Freezing a child's credit report will not only prevent the child from borrowing money without the parents' permission, but could go a long way toward eliminating the threat of identity theft.
If Not You, Who?
Talking with clients about their childrens' spending habits may seem excessive. But with all that is at stake, it's a logical addition to the normal saving-and-paying for college advice most parents want. In fact, the next time you cut a client a check that's going to cover college costs, you might want to toss in a coupon for a free large pepperoni.
Writer's BIO: Kevin McKinley CFP is a Vice President-Private Wealth Management at Robert W. Baird & Co., and the author of the book Make Your Kid a Millionaire (Simon & Schuster). You can reach him at email@example.com