Study Shows College Students Lack Financial Literacy, Postponing Financial Independence After Graduation

By Maylan Lamhut Studart, Staff

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Bronx native Manahidy Soler has been trying for months to pay down her over $1,400 credit card bill. “They charge you interest every month and I realized the minimum payment I was making wasn’t helping,” said Soler, a first-year communication arts graduate student at NYIT.

Soler is one of the four out of five college students nationally who say they would like to learn to manage her credit better, according to a recent study by student loan company Sallie Mae. The study, completed in December 2015, found that only 49 percent of students viewed their credit report and know their credit score, the underpinnings of a person’s financial life. With student loan debt at a record $1.34 trillion and delinquency rates remaining above 10 percent for the past five years, college students seem unaware of how to manage such debts or where to look to learn about credit, often leaving the responsibility with parents.

Fewer than one-third of college students successfully answered questions on credit basics like interest accrual and repayment terms, according to the study. Although 56 percent of college students own a credit card and 77 percent pay their bills on time, the complexity of credit management and learning the financial jargon still inhibits many from knowing about their credit report and score. In this article we break down the factors credit agencies use to calculate credit scores; we will also bust common credit myths and provide resources on where to find more information. Building good credit is important because it can be the difference maker in buying a car, getting a student loan with low interest rates, getting approved for credit cards with the best rewards and even for getting a job or if a landlord accepts a rent application.

NYIT Senior Director of Financial Aid Rosemary Ferrucci is aware of the knowledge gap in financial literacy among students. She found students react better to one-on-one conversations about debt in her office than to scouring the internet on their own time. “So much available information is overwhelming,” Ferrucci said about the internet. “They are terrified of buzzwords like debt, credit report, student loans.”

Ferrucci said parents are the best resource to teach the value of money and credit. The Sallie Mae study found that 71 percent of students say their parents are the most commonly used resource to learn about managing money. “That’s where the schools need to step in because this is not (always) available at home,” Ferrucci said of some students she encounters, “the parents don’t have that exposure. In a perfect world, they would’ve had this inculcated in them as they grew up, but maybe you are in a position where your parents perhaps don’t have credit cards or never could get a credit card.” 

How your interest rates affect your bill and payoff amount. Source: CNNMoney

How your interest rates affect your bill and payoff amount. Source: CNNMoney

So what do students do when parents themselves don’t know how to appropriately manage debt, are having difficulties of their own or don’t know how to teach their children about personal finance? To many, including some interviewed for this story, it’s not just the anxiety and fear of learning complicated credit jargon, but becoming indebted inhibits students from building credit in the first place. According to the Sallie Mae study, 47 percent of students surveyed said they don’t own a credit card to avoid debt. It could be that some postpone learning about credit until the very moment they need to start repaying student loans and others even avoid it for as long as they can. Marketing sophomore Jonathan Flores seemed to want to avoid discussing his finances. Flores said he is more focused on being a NYIT lacrosse defenseman and on his grades than on finances. “I don’t need to know it right now,” said Flores of his credit score. Flores’ only line of credit is with a furniture company, which he said he is paying off at his own pace.

Nationwide, early and serious delinquencies of credit card debt have risen considerably in the past year by 2.03 percent according to the Quarterly Report on Household Debt and Credit by the Federal Reserve Bank of New York. Soler said her own parents, who gave her a credit card as a birthday gift, don’t know how to manage money well. She said she has been putting off learning how credit works since she got the card. “I don’t want to know my credit score because I knows it’s not good, so I haven’t checked it in a while,” Soler said. Her credit card balance is approaching her limit and she doesn’t understand why it won’t decrease. “I started paying double the minimum payment, but now the minimum payments are getting higher,” said Soler of her MasterCard bill. “I don’t know if the minimum includes the interest rate, I don’t think it does.” Soler’s bill does include interest and that is why her bill won’t go down. The less paid monthly, the more interest accrues, adding what was once interest to the principal, or main balance of the card.

Percentage of balance 90 or more days delinquent by loan type. Source: New York Fed Consumer Credit Panel/Equifax

Percentage of balance 90 or more days delinquent by loan type. Source: New York Fed Consumer Credit Panel/Equifax

This lack of understanding of credit leads to many believing credit myths without verifying their accuracy. (See sidebar). One student interviewed for this story thought that paying only the minimum payment on a credit card would help build credit – but it hurts credit depending on how high the balance and ends up costing more in interest, delaying the payoff date. Three of the students own a store card, which is a line of credit from a particular company, like Macy’s Inc. or Best Buy Co. Inc., that typically comes with very high interest rates above 22 percent. Average MasterCard and Visa rates typically vary from 15 to 18 percent. Some didn’t know that a store card affects a person’s credit report and balance the same way as a credit card.

Some students are fortunate to have parents who understand the importance of building credit while young. Alexander Gusmano, a senior in computer science was nudged by his parents. “I wasn’t really looking, but my parents encouraged me to get a credit card to build credit,” said Gusmano. He said he pays more than the minimum monthly payment required, but when it comes to his credit report and score, he isn’t interested. “It’s in the back of my head, it’s so far back there I don’t really think about it,” he said. He believes carrying a balance on his card will help his credit score, but this is another credit myth. A zero balance is always best because it avoids interest charges and a balance above 20 percent of a credit limit could have a negative effect on a credit score.

Like Gusmano, NYIT Bear midfielder and political science major Astasia Williams also avoids learning about her credit score and said she doesn’t want to know until after graduating next year. “To be completely honest, I don’t know much about it,” Williams said. “I use my debit card for food and clothes only when I really need it,” said Williams, who relies on her parents for expenses. She said she will look into learning about her credit after she begins to pay off her student loans.

Tyler Ancrum, a junior in information technology began learning about credit after seeing a credit score commercial on TV and asking his mother if they could find out his. “My mom is the CEO,” Ancrum joked. His mother is a co-signer on one of his two credit cards and she manages Ancrum’s credit. He said he would like to learn how to manage it himself. “I want to build it up more so that I don’t have to worry about it in the future.”

To understand credit, one needs to first understand why managing it responsibly is so important to becoming an adult. According to the Financial Industry Regulatory Authority (FINRA), lenders use a credit score as a screenshot of a person’s credit risk. The higher the number, the less risky you are seen to lenders and the better the terms you can get on borrowing costs for credit, like for example a mortgage. The terms of these loans, or the interest rate paid as a cost of borrowing money, can be burdensome for those with low credit scores. Scores range from 300 to 850 and a higher credit score could possibly save hundreds of thousands of dollars during the course of a person’s life.

The formula that leads to a high credit score is key to managing debt. These are the factors that affect a credit score:

Percentage distribution of factors that affect your credit score. Source: creditsesame.com

Percentage distribution of factors that affect your credit score. Source: creditsesame.com

  • Payment history, or how many years you’ve been current on your bills is 35 percent of total score.
  • Credit utilization, or the balance you’re paying off compared to your limit weighs on your score by 30 percent. Coincidentally, having a credit utilization ratio upwards of 30 percent will set off alarms to lenders.
  • Length of credit history, or the average age of your accounts, is 15 percent of total score. New borrowers have low credit scores naturally because a credit history needs to be established, so be patient if you’re starting out. A co-signer like mom or dad can help you start building credit because their scores are taken into consideration.
  • Credit inquiries, or every time you apply for credit, are recorded as hard inquiries on your report and this is 10 percent of total score.
  • Finally, the types of credit you have adds the final 10 percent of the score.

Some parents are still recovering from the Great Recession, while others have gained back the ground lost. Household debt reached a record high of $12.7 trillion this year, surpassing the peak before the 2008 financial crisis, according the New York Fed survey. Perhaps college students’ fear of debt is legitimate after witnessing their parents live through the greatest economic crisis since the Great Depression. However, learning how to successfully manage debt is a way to avoid the ghosts of the past. The financial health of households is the bulk factor in economic growth, as consumer spending typically makes up more than 70 percent of gross domestic product. Given that the foundation of the nation’s financial health is credit, it would be a welcome change if the next generation fared better in credit management than their parents.

Soler said she now knows how important understanding and managing credit is to adulthood. “I didn’t know just how important those kinds of things would be to my future!” Soler said in a text after we discussed the subject. “Had I known, I probably would’ve learned earlier.” Soler said she wants to learn to manage debt better, but said she believes her situation is symptomatic of a bigger problem. “As a whole, we are terrible with that – America itself is in trillions of dollars in debt – it defines us as a people.”

The Fair Credit Reporting Act requires each of the nationwide credit reporting companies — Equifax, Experian, and TransUnion — to provide you with a free copy of your credit report, at your request, once every 12 months. You can get yours at annualcreditreport.com from a private computer. You can also check each company’s websites individually, making sure the lock icon is showing next to the address bar in your browser signaling a secure and encrypted connection. Creditkarma.com and nerdwallet.com allows you to check your credit score free daily to follow changes and have resources that help build credit, such as credit calculators, simulations and information. Myfico.com and FINRA.org have A to Z information on how credit works and what you can do to build it.

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2 Comments

2 Responses to “Study Shows College Students Lack Financial Literacy, Postponing Financial Independence After Graduation”

  1. Lcrio on October 23rd, 2017 10:38 AM

    Very good material. Credicard in Brazil charges 350% year !!!

    [Reply]

  2. Lilian Lamhut on October 23rd, 2017 10:48 AM

    Incredible storystory

    [Reply]

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