Several CSUB students had this chance on Feb. 10 when Eric Bruen, the CEO of Desert Valleys Federal Credit Union in Ridgecrest (East Kern County), presented his “common sense” perspective on building and maintaining good credit during an hour-long workshop sponsored by the CSUB Academic Advising and Resource Center.
Bruen began his presentation by defining credit as “the ability to borrow money from an entity to purchase goods or services.” He also discussed one of his guiding thoughts about credit: “Credit is like a looking-glass, which when once sullied by a breath may be wiped clear again; but if once cracked can never be repaired.”
What this means, according to Bruen, is that credit scores are dynamic and based on a consumer’s behavior now. This is why it is possible to rebuild credit as long as the behavior that got the consumer into debt changes too, Bruen added.
In many situations, credit is granted on the personal credit history of the applicant alone, i.e. an applicant’s credit score, Bruen said, which is determined by a computer formula. Credit scores range from 380 to 830 and are based on current payments and debts, credit inquiries, previously paid or unpaid loans, as well as the consumer’s credit capacity (the total amount of credit the consumer is approved to borrow.)
According to Bruen, capacity is the single element that has the largest impact on consumer credit scores.
Credit capacity is “the ability for a person to borrow in comparison to the amount they actually owe,” Bruen said.
For instance, $10 spent from a $100 loan would leave that particular borrower with a capacity of 90 percent. The larger the capacity, the more likely it is that the borrower will be able to pay back the money that he or she has spent.
In other words, “The 90 percent capacity tells the scoring model that you are only using a minimum amount of what you can borrow. This also sends a message to the computer systems that you have the ability to borrow, but not the need to,” he said.
The challenge that many students face is a lack of credit, Bruen said. “If you’ve never borrowed money from anyone, how would the computer know that you are reliable in paying what you owe back? You’re not teaching the computer anything.”
Credit cards, then, are, “a necessary tool in building capacity. … the danger is not understanding the risks and using the credit without the consideration of the ability to repay.”
Students can apply for a card, Bruen said, and periodically charge small purchases – perhaps a meal out – to generate a charge and payment cycle that the credit card company can report. This process will help them build credit.
Most banks will offer “starter cards” to their customers, with lines of several hundred dollars for the purpose of building credit.
Credit cards are essential tools for building credit, Bruen said, but students should be aware of what can happen if they are used irresponsibly. He cited the example of a student at another university who charged $10,000 in debt on her credit cards during her undergraduate years. She will spend much of her hard earned money as a professional paying back what she owes rather than enjoying her new status, Bruen said.
Bruen cited the median credit card interest rate of 30 percent as another example. If a consumer spends $1,000, he or she will be charged $300 each year in interest, $3,000 for $10,000 and $30,000 for $100,000.
In addition to being responsible with their credit cards, students also need to be aware of the amount of student loan debt they have accumulated, Bruen said.
Government-backed student loans are the best type of loans to have as a student because of their low interest rates (and because the government will pay the interest on some types of loans while a student is in school), according to Bruen. However, students need to be aware that these loans are not dischargeable in bankruptcy. These loans will be with them for a long time.
The program, hosted by the Academic Advising and Resource Center, was the fourth in a series of career workshops featuring professionals from the Kern County area. It was inspired by the AARC’s undeclared students, as well as student-athletes and the NCAA’s CHAMPS/Life Skills program. The career workshops are part of an effort to capitalize on the incredible knowledge, skills and diversity of professionals living and working in Kern County. For more information, about AARC, visit www.csub.edu/aarc.
— By Jessica Shillings, Academic Advising and Resource Center student intern