thursday, april 1, 2004
debt & credit
the university daily kansan
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contacts a legal representative such as KU Legal Services for Students or an attorney, collectors can no longer call the student, said associate director Michelle Kessler. Kessler said that the collectors can only discuss the debt with the student's legal counsel.
At that time, the student can work with an attorney to try to negotiate an easier repayment plan.
Regardless, any involvement with a collector has severe ramifications for a student's credit.
"It shows they had to sue you to get money from you," Kessler said.
Legal Services for Students will also refer students to professional credit counselors to help students stuck in debt.
Baker's agency offers its customers financing and repayment alternatives to manage large overdue balances.
Shaughnessy was not approved for a cell phone just after his debt was paid and had to get it in his grandmother's name.
Collectors can turn aggressive after three to four months of delinquency with large balances. Baker said.
Once the debt is paid, however, credit problems still linger.
Unable to secure his own car loan with his credit, he had to get his uncle to cosign for the car. The cosigner assumes the responsibility of the debt should the borrower fail to make payments.
They can issue garnishments on a delinquent borrower's paycheck. A garnishment allows the collector to lay claim to a maximum of 25 percent of a person's paycheck.
Some car dealers arrange other options for customers with poor credit. Bad credit can result in higher interest rates from smaller lenders.
"Ideally we go for lower interest rates, but if that doesn't work, higher risk will mean higher interest rates," said Scott Hester, sales manager at Johnny I's Used Cars, 814 Iowa St.
National lenders with lower interest rates will only accept very good credit scores. While a good credit score generally lies around 700 to 680, local credit unions will approve financing for scores as low as 610, Cook said. Credit scores can range from 850, which is perfect, to 300.
In cases of lower credit ratings, the creditor will require a cosigner, a smaller loan or a larger down payment.
Cook said a larger down payment makes it easier for any creditor to approve a financing plan, like a customer who seeks a $10,000 car and has $3,000 to $4,000 for an initial down payment.
A poor credit rating is not necessarily permanent for anyone.
"Don't think your credit is shot and you can't fix it," Baker said. "If you pay it off, it shows."
Photo illustration by Kit Leffler/Kansan
Baker said credit scores track activity over a two-year span. Eliminating old debts and making consistent payments can correct a poor FICO score.
A person's credit score is called a FICO score. The term come from Fair, Isaacs, & Company that created the score. A perfect FICO score is 850. The worst possible score is 300. Good credit is normally considered 680, according to Rich Cook, affiliate manager of Free State Credit Union, 1001 E. 23rd St. Cook said many students he works with have a score around 620.
The score is derived from a variety of factors. According to USBank, the factors are as follows:
incentive to get payments on time is twofold.
35 percent: This portion is based upon one's past payment history. Creditors determine the frequency of late payments, or non-payments, and the length of time it took to make a payment based on 30-day intervals. Timely payments do improve credit scores, so the
30 percent: This portion of the FICO score comes from outstanding debts versus the amount of credit one has. For instance, a $200 debt is compared to the $1,000 credit limit afforded on one credit card.
15 percent: The length of one's credit history affects this percentage of the FICO score. This factor is a problem for many students because only a few negative factors in a short credit history has severe effects, said Cook. Since credit cannot be extended to anyone until they are 18 years old, most college students work with a relatively short credit limit.
10 percent: New credit totals makes up ten percent of the
score. The more lines of credit a student has the more likely creditors will assume the student will get incur maximum possible debt, said Jeff Sizemore, personal banker at USBank, 1600 E. 23rd St. For example, if a student has 4 credit cards each with a $1,000 credit limit, the creditors assume the student will incur all of that $4,000 potential debt.
10 percent: Finally, the last portion accounts for the types of credit a student holds. Creditors can distinguish among credit cards and car loans and student loans. Having no credit history is worse than having some credit history, especially if that credit has been managed appropriately.
A student's understanding of the factors and how they affect the FICO score can help prevent future credit mishaps.
After having to quit school for a semester to pay off his debt, Shaughnessy, now a junior, learned his lesson about debt and credit.
cards.
He now pays his car payments ahead of the due date. He no longer uses credit cards, opting instead for checks, cash or debit
Source: USBank
A year-and-a-half removed from his last credit card payment, his payment history has been flawless. He recently was approved for a new cell phone with two lines, in contrast to originally being denied 18 months ago.
He said students should not necessarily avoid credit cards, but they need to be very careful in how they use them.
"They can be great." Shaughnessy said. "Just don't get ahead of yourself."
- Edited by Paul Kramer
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