Credit Score Interview

This morning, I was interviewed by a local student about credit scores. Here is the Q&A:

1. What are the implications of having either a positive or negative credit history? (give specific examples)

Answer: Your credit score clearly affects your ability to get access to credit. A few years ago, a low credit score simply meant you paid a higher interest rate on your car and mortgage loans. Today, a low credit score likely means you can’t get a loan at all. Also, financial companies besides lenders use credit scores as well. Apartment landlords will use credit scores to determine whether you’ll fulfill the terms of a lease. Insurance companies will use your credit score to determine if you are good risk for car and home insurance. While a credit score measures how much debt you have, it is mostly based on your record of making bill payments on time. Insurance companies have proven statistically that people with low credit scores are more likely to have accidents and make claims than people with higher credit scores. They rationalize that people who make sure to pay their bills on time are probably cautious in other aspects of their lives like driving and will have fewer claims.

2. What would constitute a responsible use of credit?

Answer: A good use of credit is to make a purchase that will either increase your income or reduce your expenses. For example, you may live in an area where there are no jobs within walking distance, so you borrow money to purchase a car. Now, you are able to drive to get to a job that will pay you enough income to repay the car loan and have money for living expenses.

3. What are three (or more) inapproriate uses of credit?

Answer: An inappropriate use of credit is to make consumable purchase that you cannot afford. For example, you live paycheck-to-paycheck without any saving any money. You decide to purchase several new outfits because fashions have changed. You reason the minimum monthly payment required by the credit card company is only $25. This is inappropriate because you may not be able to make the payments and the amount of time it will take to repay the credit card will exceed the time the clothes are still useful.

4. When selecting a credit card, what factors should one consider?

Answer: When selecting a credit card, the factors that matter most are the annual fee, the interest rate charged, the length of grace period, and any rebates or rewards offered by the credit card company. Personally, I use the American Express Blue Cash Card because I payoff my bill every month, I don’t even know what my interest rate is. However, I know that I have no annual fee and get 1.5% cash rebate back on all of my purchases.

5. Do you think high school students should have credit cards? Why or why not? Explain.

Answer: High school students should not have credit cards because most do not have any income for repayment of their credit card debt. Another reason high school students should not have credit cards is the peer pressure young people feel for conspicuous consumption. In today’s society, there are constant marketing messages about successful people enjoying their money through spending. It is as though you need to spend to show that you are successful. Well, you can also borrow money to spend so that you look successful. In my business of giving financial advice to people, I meet many people who drive BMWs but they don’t have enough savings to become my client. The way to financial independence is through savings. This lesson is not taught to high school students. I fear the pressures to spend would lead too many high school student to use credit inappropriately. In today’s cashless society, high school students may not want to use cash for normal purchases, so I would suggest getting a student or free checking account at a local bank and asking for a debit card linked to the account. This way the student will only make purchases when they have money in the account.