The case for having no credit in college

We've been talking a lot this week about college students and credit cards. Along with pizza, dorm rooms and late night study sessions, credit cards have become an almost mandatory part of the college experience. According to a Nellie Mae study, "Students double their average credit card debt - and triple the number of credit cards in their wallets - from the time they arrive on campus until graduation." Graduating students leave college with about $20,000 in student loans and credit card debt. Not a great way to start a career.

Parents, students and credit card issuers often cite the importance of establishing a credit history early and having access to emergency cash when supporting credit cards on campus. I think this is hogwash. The dangers of having a credit card as a student far outweigh the benefits. Here's why I think you should tell your teen to go without a credit card in college:

• The combination of no income and plenty of opportunity to spend can easily create a "debt vortex." You'd be amazed at how fast a few pizzas can add up to thousands in credit card debt.
• Managing your credit is hard work. You'll need to check your credit card balances regularly, pay your bills on time each month and check your credit reports 1-2 times a year.
• One screw up in college can easily damage your financial future for 7-10 years. All it takes is a 90-day late payment on a credit card for your credit score to drop dramatically and stay that way well after college.
• In turn, damaged credit can impact your ability to get a cell phone, car insurance, an auto loan, utilities such as electricity and gas, a job, an apartment or a mortgage in the future.
• Remember that "no credit" is often much better than "bad credit" from a lender's perspective.
• It isn't that hard to establish your credit after college. A student opening their first card after graduation and using it responsibly can have a credit score in the high 600's within just a few months. That score will qualify you for standard rates on most new credit.
• Each credit card you apply for (to get a t-shirt, gift card, 10% discount at the Gap, etc) will cause a ding in your credit score. Even if you close the account right away, a record will stay on your credit report for at least seven years. You should only open credit cards you intend to keep and use for a long time.
• There are other ways to deal with money emergencies. For example, parents can offer to put some emergency money into a savings account that can be accessed by an ATM card. Or it is usually easy for a parent to call in their credit card number to a hotel, mechanic or hospital if required.

I hope this list helps your college student "just say no" to credit cards! Did you have a credit card in college? Share your stories in the comments section below.

Shredder Dangerous to Pets and Kids

We are buying shredders at record rates to protect ourselves from identity theft, but many of us don't realize the potential danger in that little piece of household equipment.

I recently received a forwarded email warning about the dangers of shredders to pets. The email recounted a horrifying incident in which a dog lost its tongue (and ultimately its life when it had to be euthanized) in a paper shredder. As I always do when receiving mass forwareded email warnings, I checked it out at TruthorFiction.com and Snopes.com. The Snopes evaluation of this true rumor was even more horrifying than the original post, as it pointed out dangers to pets and small children of seemingly harmless shredders -- even those that are turned off.

I also took at look at the US Consumer Product Safety Commission website where I learned that from January 2000 through September 2005, CPSC received 50 reports involving finger amputations, lacerations, and other finger injuries from paper shredders. The majority of injuries were to young children under the age of 5 years.

The CPSC warned that paper shredders can pose a risk of finger injury to children because of their small finger size. With no force applied, a child's finger would not likely penetrate the shredder opening since their finger diameter is typically larger than a paper shredder opening. However, depending on the design of the shredder, the shredder opening may enlarge as the shredder pulls in the paper and child's fingers. Based upon information presented in in-depth investigation reports, injuries often occurred when children were feeding paper into a shredder (under adult supervision!!) and did not release the paper in time to prevent their fingers from entering the shredder opening.

While various groups are calling for voluntary redesign in the standards for shredders, in the meantime, please use caution:

• Do not let your child use a shredder, even under your direct supervision. It is not a toy.
• Always unplug your shredder when not in use and store it out of reach from small children.
• If you have pets, you should also unplug your shredder when you are not using it and keep pets away when it is plugged in or in use. There have been reports of pets accidentally turning on a shredder then curiously licking it, with tragic results.

Katrina's credit and money lessons

With the one year anniversary of Hurricane Katrina there has been a lot of debate about what lessons were learned. As a society, did we learn the importance of mandatory evacuation? Levy engineering? Rebuilding communities?

And you can't forget some of the personal lessons from Hurricane Katrina. Did your family learn to create an emergency evacuation kit? To keep a supply of bottled water at home? Are your finances prepared for a disaster?

Credit.com prepared several articles about money and emergencies with Katrina in mind. One of my favorites is called "Emergency Preparation." This article details what you can do to make sure your finances are ready for dealing with a crisis. Another great article called "When Bad Things Happen to You" reviews your options for dealing with a financial emergency. And our book on identity theft (available this fall) includes a chapter on protecting your identity during a disaster. Here are a few quick tips from Credit.com:

• Create an emergency savings account. Keep enough saved in this account to cover your housing and basic expenses for a few months.
• Make sure you have access to credit cards. A credit card can help you deal with emergency expenses.
• Put a 90-day fraud alert on your credit report if your home is damaged or evacuated. Identity thieves prey on disasters and this alert could help protect your identity
• Store copies of insurance, mortgage and personal documents in a secure place outside your home, such as a safe deposit box.
• Remember to communicate with your creditors during a crisis. They will often be able to help with your bills and situation.
• Be aware of insurance and aid scams after a disaster. Fraudsters may pose as charity services in order to steal personal data and money from victims.
• Set up online access to your accounts. Being able to check your bank, credit and loan accounts online can be invaluable if you are displaced from your home.

Do you think you are financially prepared for a disaster? What personal lessons did you learn from Katrina? Share your tips and feedback in the comments section below.

Three things you must tell your college freshman!

College students across the country are packing up the family van and heading out to set up their first dorm rooms. Along with important lessons like how to do laundry and putting together a loft bed, every parent should pass on these three quick credit lessons to their new college freshmen:

1. Credit cards are for emergencies only.
If you decide to give your college student a credit card (and I recommend that you wait) be sure to pound it into their head that it is for emergency use only. Normal adults can use credit cards for non-emergencies...but this is because they have something called an "income." College students have plenty of pressure to spend, but, with no income, they should stay as far away from credit cards as possible. The plan is to graduate with a degree, not crippling credit card debt. The best way to safely give them access to emergency credit is to set them up as an authorized user on one of your cards. This way, you'll receive the bill for the amount they've spent and can dole out reprimands accordingly.

2. Avoid on-campus credit offers like the plague.
Credit card issuers are a staple on modern campuses. Offering free t-shirts, free pizza, etc in exchange for filing out a simple credit card application may seem like a good deal to a college student but can have a long lasting negative impact. Every credit card a student applies for causes a damaging "hard inquiry" to be reported to their credit reports. And each card you open (even if you close it immediately) puts a record on your credit report for 7 years. Advise your college freshmen to not even make eye contact with these on-campus creditors. Instead, they should shop around online if they want to open a credit card.

3. There will be hell to pay if you use credit irresponsibly.
It can be easy to downplay the impact of credit card late payments in college, but every student should know that their credit behavior now will have a major impact on them for the next 7 to 10 years. One 90-day late payment on a credit card during your freshman year could come back to bite you when you are trying to buy a car or a house, get insurance or apply for a job after graduation. It is especially important for students to understand how collection accounts could also damage their credit. That one unpaid parking ticket or video store late fee could plague your finances for the next decade.

With a little understanding of the consequences and some support from their parents, most college students will be able to make smart credit decisions. What credit lessons did you learn in college? Share your stories in the comments section below.

The End of 100% Financing?

It is pretty clear that in some markets, housing prices are falling.  The numbers are small, at least so far, on the order of 1% or 2%, but the potential for steeper declines certainly has to be taken into consideration.

Let's look at the risk should the market head south.  If you're the buyer, even if the market tanks, you have to live somewhere, right.  We did have some experience with this in Southern California in the early 1990's.  At that time, the most you could borrow was 90% of the value of a home, but some homes went down more than 10%.  Those who were hurt were those who had to sell. And some of them did "short sales," where the lender took as payment in full whatever the proceeds of the sale were.

In fact, most people just stayed put, realized that that their homes were – at that moment – worth less than the sum of the mortgages.  They figured they would still be there when the market recovered. It finally came back and property values are now probably 300% higher than at the bottom.

Which brings us to the lenders in the all to common 100% financing programs.  Most of these are done with an 80% LTV 1st and a 20% LTV 2nd for the balance.  The lender on the 2nd is, effectively, assuming all the risk if values should drop.  In the event of a foreclosure, not only would they be "out" the difference between the sales price and their loan balance, they would also have to bring and keep the 1st current during foreclosure. Finally, they would also have to pay the real estate commission on the sale when they finally got it back.

I can't imagine that they could even get 50 cents back for each dollar of their loan.  So how long will they be willing to provide this financing?  What then happens to the market when that kind of popular financing is no longer available?

Funny Money Friday: Origins of the wedding money dance tradition

Money doesn't have to be boring! Each week, CreditBloggers.com takes a look at the lighter side of the personal finance world in a series called Funny Money Friday.

Wedding season is coming to an end in most parts of the country. But the season is just getting going here in San Francisco, where the best weather is in September. Weddings inevitably bring with them the controversial "money dance." This increasingly popular dance asks guests to pin or give money to the bride and groom in exchange for a dance. How exactly did this tradition get started?

Most sources credit the dance as originating in Poland. Called "Pani Mloda," a bride will often collect dollars from guests in an apron donned just for that dance. There are even special songs that accompany the dance in Poland:

Put some money in the plate
Put some money in the plate
for her high veiled bridal cap.
for her high veiled bridal cap.

Put some money in the plate.
Put some money in the plate.
Let the whole family help out.
Let the whole family help out.

In Italy, brides hold purses instead. In Hungarian and Portuguese weddings, the bride's shoes are passed around to be filled with money by the guests. Filipino custom involves pinning and wrapping money in elaborate designs. In the US, money trees are becoming popular as a way for guests to give cash without the dance.

Supporters of the money dance say that it is a tradition and a way for the bride and groom to get some needed extra money for starting their life together. Plus, it gives each guest a chance to spend a few private moments with the bride or groom. Opponents of the money dance say that it is a tacky way for the newlyweds to extort their guests for a little more money.  I personally would put myself in the "opponent" category, although I have been to many fun Filipino weddings that involved the dance.

What do you think about the dollar dance? Is it a lovely custom or a greedy grab? Did you have a money dance at your wedding? Share your feedback in the comments section below.

Reader Question: Will a DUI appear on my credit report?

I love it when I receive a question I've never been asked before. After many years in the credit business, you get used to answering the same questions about credit scores and collection records over and over. This question from Bianca was completely new to me:

I have a question about credit: Is it true that if you get a DUI ticket this would affect your credit? If it does, how and why?

What an interesting question!  A ticket, for Driving Under the Influence or anything else, alone wouldn't be reported to your credit reports. A record related to a DUI would only appear if there was some sort of unpaid fine that was sold to a collection agency or if the fine became a court judgment. Technically, the Fair Credit Reporting Act allows for criminal records to be recorded on credit reports but the credit bureaus don't include it.

The DUI record would appear on a criminal history and would come up during background checks however. And it will certainly impact Bianca's ability to get auto insurance in the future.

Next question? Send your credit and money questions to tidbits@credit.com.

Is that lender legit? (part 2)

Last week I explored what sounded like good advice about how to check out a business and figure out if it was legitimate.  Despite some very logical sounding advice, that usually starts with "everyone knows that you should . . . "I found out that it isn't as easy as it sounds.  Most people don't know how to check out a business. Last week we checked with the Better Business Bureau and Chamber of Commerce to find out if United Lending is a legitimate business.   This week we are going to try two new pieces of advice – Licensing and references.

I would ask if they are licensed

Licenses?  It is always best to choose and deal with a lender that is well known, because a reputable lender is probably licensed in your state.  But since I am trying to find out about a company I have never heard of -- United Lending Financial Services in Maine, I need a different approach. There are all sorts of different kinds of licenses. Where do I start?

It is easy but it will take some time.  First, I need to find out (1) if United Lending needs to be licensed to offer me a loan California, the state where I live, and (2) if so, is it licensed in California.

First, try asking the lender. The easiest thing to do is to ask them or check their website and look for the licensing information.  For an example of what you should see go here.  What should you ask?  Can you believe what they tell you? No, but take whatever information you can get from them because there are ways to check it out quickly. If they don't respond to your questions they probably are not a legitimate business. Here are some good questions to ask:

1.  Where is the company incorporated? What year was the company incorporated?  In this case United Lending told me they aren't incorporated.

If a company is incorporated you can go to the state Department of Corporations or appropriate state licensing authority for corporations, and do a search on the business name.  If it is incorporated you will find it.  To find the appropriate licensing authority in your state go here or here.

2.  If the entity is not incorporated ask:  What type of business entity it is; What state it is registered in, and What year it first registered in that state.  (All states want to collect taxes so if it is a legitimate business it will be registered somewhere.)  United Lending told me it is a small private lending company and is not incorporated.   

3.   Ask if the business is licensed to loan money in the state where you live? If the answer is yes, ask them what license they hold in your state.   You can check this at the state site licensing authority.

I went to lenderlicense.com and clicked on 'Useful Links.' When I clicked on "California" I was directed to "The Department of Corporations." I clicked on "Financial Service Licensing Information" and found out that lenders must be licensed in California to offer the type of loan United offered.  Next I searched to see find out if United Lending Financial was licensed.  Ah hah!  United Lending Financial Services is NOT licensed to offer loans in California.  Now that was easy.

If you live in another state that doesn't require lenders to be licensed I would try the website for your state and local government: From there go to the Attorney General's site.   First check and see if there are any complaints issued against United Lending.

Next try the Department of Corporations (Some states provide this service on the Secretary of State site).  Maine had a search feature so I was able to search for particular business name -- United Lending Financial in Wells, Maine wasn't listed.

Finally, just to make sure, I clicked on the "Contact Us" button and sent an e-mail asking about United Lending Financial Services Company.  Within 24 hours I had an e-mail response – United Lending Financial Services does not exist in Maine. It is a scam organization using a Maine address.

I would ask for references

Great advice, especially if the company is a privately held company.  Ask for references from professional entities, funding institutions, insurers, partners, borrowers, accountants and attorneys. And, ask to see their financial statements.  If they balk or refuse, you have your answer – don't deal with them.

What is your advice for finding out if a business is legitimate?

Get a Free Calculator from Visa

Step right up ... quickly ... and a free solar powered calculator will be yours, courtesy of VISA, which is giving away 50,000 of them in the US. To get yours – which Visa will mail out on a first-come, first-served basis -- visit Practical Money Skills, a Web site Visa set up to further financial literacy.

According to a Visa survey, 77% of parents believe money management is a subject "very important" to their children -- second only to writing at 89%. In response, PracticalMoneySkills.com helps teachers, parents, and students learn about personal finance. There are educational resources for the classroom as well as lots of interesting tools for parents and kids – including quizzes (what's your money personality?) and tips on everything from giving allowances and banking to preparing for retirement and smart shopping.    

Visa's already sent out over 15,000 calculators, so get clickin'. I just did, and found the registration process painless. I wasn't even asked if I had a Visa card, although it's a pretty safe bet, since there are over 1 billion Visas out there.

While Visa promises to get the calculators out asap, you won't get yours in time for the first day of school. But it'll probably be there by the time some little urchin misplaces theirs. In the meantime, you might want to visit the site's tips for back to school shopping.

Even though there are no urchins where I live, calculators disappear with great regularity, so I'm certainly looking forward to getting one on Visa's nickel. I'm also going to spend some more time on the Practical Money Skills site, and urge you to do likewise. It's a great time of year to get the whole family focused on money smarts. Chances are, you'll also find resources to share with a teacher or two. It's a great time of year for that as well, before the semester is eaten up with the required three R's. Let us know how you make out!

The Desperation Situation: Why consumers fall for loan scams

We've recently received a few reports from readers who have fallen for advanced fee loan scams. In this scam, a "lender" calls you up offering a loan. They fax over contracts and provide you with 800-numbers, it all seems official. There is just one step to complete before you'll get your money, you need to wire $300-$2,000 to Canada to secure the loan and buy an insurance policy.

Most people stop at this point and say "Are you crazy?! I'm not sending you scammers any money!" But for borrowers who are in desperate need for a loan, they'll often just ask how soon the lender needs it. Once the money is sent by Western Union it is gone forever, along with the scammer. 

It's easy to just chock this up to their being "a sucker born every minute" but I think the issue runs deeper. Americans are in bad financial shape these days. The savings rate is below $0. The average household has $9,300 in credit card debt. The average credit score is a pretty paltry 675, just barely high enough to qualify for standard rates.

To sum it up...there is a "Desperation Situation" when it comes to Americans and their money. Borrowers are increasingly willing to take a chance on expensive payday lenders, Nigerian millionaires or strangers who call them with loan offers, just for a chance to get some cash. Are we becoming a nation of debt junkies, willing to put common sense aside for a chance at a loan "hit?" It seems like it if a scammer can just randomly dial phone numbers and find victims willing to send them thousands of dollars.

What can we do? Educating consumers to identify these scams is a good start. But this only treats the symptom, not the sickness. Instead, consumers need to take control of their finances. Start saving money. Stop borrowing to within an inch of your income. Improve your credit scores so that you can get authentic loans when you need to. Use common sense when an offer sounds too good to be true. Like the brilliant SNL skit says: "Don't buy stuff you cannot afford."

Do you think there is a "Desperation Situation" in the US right now? What can be done to fix this issue? Share your feedback in the comments section below.