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5 Smart Credit Moves for College StudentsBy?Jim Wang, Contributor??|?July 23, 2012, at 9:30 a.m.Years ago, when I first started college, I signed up for a Citi credit card because it offered 1 percent rewards, no annual fee, and a few other small perks I never used and can't even remember. I was a freshman in college and I foolishly signed up at a table outside my student union. I was fortunate in that I was able to get the card and start building my credit history as early as possible, when I was 18, and that it wasn't an identity theft scam! Years later, looking back, I realized how careless I was even though everything turned out fine.It's scary how important your credit is these days. Once relegated to just loans and other credit instruments, your credit score is used by everyone from landlords to cell phone providers to insurance companies. Luckily, the best time to start building your credit is while you're still in school. Here are a few smart credit moves students can make to help build their credit:Get a Credit CardYour credit score depends on a variety of factors, but one of the most important is your credit history. If you don't have any debt or any credit, you currently have no history. No history means your score will be relatively low because the bureaus know nothing about you. Unfortunately, this is bad because so many places uses credit score as a proxy for risk. When you go to rent an apartment, the landlord will request part of your credit to assess your rentability. When you try to get a cell phone, they'll do the same. The best way to start a credit history is by getting a credit card.There are two ways to do this. The first and easiest way is to ask your parents to be added as an authorized user on one of their cards. By doing that, you instantly get that history added to your own history. Your parents don't even need to give you the card, though they might just for use in emergencies. If you don't want to ask them to add you or you can't, you can always apply for your own. I recommend applying for student credit cards, which are more forgiving on income and credit requirements, or store-branded credit cards, which often have low limits and low credit requirements as well. When you get the card, use it sparingly—very sparingly. Never carry a balance and don't pay a cent of interest.Use Credit ResponsiblyWhen you do get a card, you should use it sparingly and pay it off each month on time. By doing this for a year or two, you're building a history of responsible credit use and improving your score. Getting a great credit score isn't necessarily difficult, it just requires that you stay on top of your responsibilities and pay off your debt whenever it's due. Don't exceed your credit limit, don't carry a balance from month to month, don't use cash advances, and set up a good system for tracking all of this. When you exceed your limit, carry a balance, or use a cash advance, you're going to get hit with expensive fees. Don't let carelessness cost you money that you need for other expenses.Monitor Your Credit ReportThe Fair Credit Reporting Act gives everyone the right to see their credit report from each of the three credit bureaus every 12 months. Go to and request your report from Experian, Equifax, and TransUnion. If you haven't had much credit in the past, reviewing your report should take only a few minutes, since there won't be much verification involved. If you're lucky, the credit report will be 100 percent accurate. If you're not as lucky, you'll see a few mistakes. Follow the protocol outlined by each bureau for fixing mistakes and get those resolved as soon as possible. Fixing a mistake might take a few months, depending on the complexity of the problem, but it'll be worth the investment down the road. Once you've checked and fixed any problems, you only need to review that report once a year for errors.Don't Fall for GiveawaysYears ago, credit card companies would set up tables on campuses and give away T-shirts and other pieces of junk for your application. Oftentimes these people would actually be freelancers, collecting applications and then mailing them off to collect their commissions. There are two reasons why you should avoid these people (who are now banned on many campuses):Beware of identity theft. If you ever apply for something that requires you to put down that much personal information, do it through a secure form online or in the presence of the company who needs it. Putting your name, address, Social Security number, and income on a piece of paper that gets thrown in a stack on a table is a mistake.That stuff is junk. How much is a T-shirt worth? $10? $15? How much is a frisbee? $2? You're selling yourself for a few bucks for a credit card that might be junk. Does it have an annual fee? What rewards does it offer? Why do you want it? If the answer is “I need a t-shirt,” walk away because it's a mistake to get that card. All it takes is one late fee or not being aware of an annual fee to turn that free T-shirt into a $50 T-shirt. Who pays $50 for a T-shirt?Don't Pay an Annual FeeUnless you're getting something extremely valuable in return, there's no reason why you should pay an annual fee. If you have horrible credit and the only way you can rebuild it is with a secured credit card with an annual fee, then you're getting something extremely valuable. If it's a travel card and you can earn incredibly great rewards, then you are getting something extremely valuable. If the card is ho-hum and has an annual fee because the credit card company isn't satisfied with earning a few percent off your spending (that's what they charge stores), then pass on it. A credit card should enrich you, not the other way around. They should shower you with rewards, and you should pay them absolutely nothing.These are just the smart moves students can make to establish and build their credit. They're part of a larger set of 40 money tips for college students that tackles everything from banking to earning money to saving and investing.What is Predatory Lending?Predatory lending is any lending practice that imposes unfair or abusive loan terms on a borrower. It is also any practice that convinces a borrower to accept unfair terms through deceptive, coercive, exploitative or unscrupulous actions for a loan that a borrower doesn’t need, doesn’t want or can’t afford.By definition, predatory lending benefits the lender and ignores or hinders the borrower’s ability to repay the debt. These lending tactics often try to take advantage of a borrower’s lack of understanding about loans, terms or finances.Predatory lenders typically target minorities, the poor, the elderly and the less educated. They also prey on people who need immediate cash for emergencies such as?paying medical bills, making a home repair or car payment. These lenders also target borrowers with credit problems or people who recently lost their jobs. This could disqualify them from conventional loans or?lines of credit, even though they have substantial?equity in their homes.Over the past several years, predatory lending practices have been prevalent in the area of home mortgages. Since home loans are backed by a borrower’s real property, a predatory lender can profit not only from loan terms stacked in his or her favor, but also from the sale of a foreclosed home, if a borrower defaults.While the practices of predatory lenders may not always be illegal, they can leave victims with ruined credit, burdened with?unmanageable debt, or homeless.Predatory lending can also take the form of?payday loans, car loans, tax refund anticipation loans or any type of consumer debt.Predatory Lending PracticesWhile there is some dispute about what constitutes a predatory lending practice, a number of actions are often cited as such — including a failure to disclose information or disclosing false information, risk-based pricing and inflated charges and fees. There are other predatory practices such as loan packing, loan flipping, asset-based lending and reverse redlining.These practices, either individually or in concert with each other, create a cycle of debt that causes severe financial hardship on families and individuals.Inadequate or False DisclosureThe lender hides or misrepresents the true costs, risks and/or appropriateness of a loan’s terms, or the lender changes the loan terms after the initial offer.Risk-Based PricingWhile all lenders depend on some form of risk-based pricing — tying interest rates to credit history — predatory lenders abuse the practice by charging very high interest rates to high-risk borrowers who are most likely to?default.Inflated Fees and ChargesFees and costs (e.g., appraisals, closing costs, document preparation fees) are much higher than those charged by reputable lenders, and are often hidden in fine print.Asset-Based LendingBorrowers are encouraged to borrow more than they should when a lender offers a refinance loan based on their amount of home equity, rather than on their income or ability to repay.Balloon MortgagesA borrower is convinced to?refinance a mortgage?with one that has lower payments upfront but excessive (balloon) payments later in the loan term. When the balloon payments cannot be met, the lender helps to refinance again with another high-interest, high-fee loan.Negative AmortizationThis is an increase in the principal balance of a loan caused by making payments that fail to cover the interest due, in other words when a payment is less than the minimum payment. The remaining amount of interest owed is added to the loan's principal, which ultimately causes the borrower to owe more money because you are now paying interest on your interest.Mandatory ArbitrationThe lender adds language to a loan contract making it illegal for a borrower to take future legal action for fraud or misrepresentation. The only option, then, for an abused borrower is arbitration, which generally puts the borrower at a disadvantage.Protecting Yourself Against Predatory LendersThe best defense against predatory lenders lies in educating yourself about their deceptive practices. Following is a list of some of the things to watch out for:Unlicensed Loan OffersBeware of loan offers through the mail, via telephone or door-to-door solicitations. Reputable lenders typically don’t operate in this way. Make sure any lender you work with is licensed.PromisesStay clear of lenders who promise that your loan will be approved regardless of your credit history or rating. Get a copy of your?credit report, and have some idea of what you should qualify for.High Interest Rates and FeesQuestion high interest rates and fees. Refuse to accept payments you know you cannot afford. Decline any additional services “packed” into the loan, like credit or health insurance.Blank Spaces in DocumentsDo not sign any documents that contain blank spaces. Read loan documents carefully, and have them checked by a trusted friend or a lawyer, if possible.Loan Churning a ProblemOne of the most common practices among predatory lenders is loan churning, where borrowers are forced into a relentless loan cycle in which they are constantly paying fees and interest, without noticeably reducing the principal amount owed on the loan.Loan churning usually works like this: The lender makes a loan the borrower can’t afford. The borrower fails to pay the loan back on time, so the lender offers a new loan that includes another set of fees and interest. The borrower, already under stress for not repaying the first loan, agrees to the second loan and the loan-cycle churn has started.The?Consumer Financial Protection Bureau?says that 94% of repeat payday loans – churning – happen within one month of the first loan and that consumers using payday loans borrow an average of 10 times a year. The interest and fees amount to $2.1 billion for borrowers.Borrowers often end up paying $450 in interest alone for a $350 principal because of loan churning. It is commonplace among predatory lenders and something consumers with a poor credit history should be on guard against.Prepayment PenaltiesAnother practice among predatory lenders is to include a prepayment penalty on loan agreements, especially those involving subprime mortgages or car loans.A prepayment penalty is a fee charged to borrowers who repay a loan before its due date. It usually happens when borrowers are refinancing to take advantage of a more affordable interest rate. Prepayment penalties are meant to discourage borrowers from?paying off a loan?early because it deprives the lender of interest they expect to receive for the life of the loan.Prepayment penalties vary from lender to lender. Many are for 2% of the amount owed. Others are for the equivalent of six months of interest on the loan. Most prepayment penalties are based around the number of years you have been paying the mortgage and usually expire after three years.The?Truth In Lending Act?requires lenders to provide a disclosure form to borrowers that includes a box that the lender must check if a prepayment penalty is in play. The wording on the form says a penalty “may” be charged and that wording often confuses consumers. Some people will read that to mean “may not” or simply skip over it in hopes that it will not ever be enforced.The smarter practice is for the borrower to ask the lender for details on the amount of the penalty and how long the prepayment period is.Subprime LoansSubprime loans are made to?borrowers with a poor credit history?and a high chance of defaulting on repayment. They are popular again and creating debate on whether extending high-interest credit to mostly poor consumers is a good thing for the economy.The credit reporting firm Equifax classifies subprime borrowers as people with credit scores under 650. Equifax says that more than 50 million consumer loans worth more than $189 billion were made to subprime customers, and 68% of the money ($129.5 billion) went to people wanting car loans.Car buying is up 59% over the last five years and subprime lending gets most of the credit. It is a complete turnaround from the terrible reputation subprime lending earned in the early 2000’s when it primarily was used to buy homes.Subprime mortgage lending peaked in 2005 with $625 billion in loans, leading to the economic collapse in 2008. Subprime lending for home mortgages in 2014 was just $4 billion.Some consumer advocates are worried a repeat of loan default crisis is coming, but non-bank lenders like Lending Tree are taking the lead this time and claim they have new algorithms that accurately identify people who can afford the loans.Subprime borrowers pay much higher interest rates than consumers with good?credit scores. For example, Elevate Inc., an online lender in Texas, offers subprime loans to people with credits scores of 580 to 625 at interest rates between 36% and 365%.Many states have laws preventing high interest rate loans. The Consumer Financial Protection Bureau is looking at requiring lenders to consider borrowers’ ability to repay before extending loans, similar to what it already does with?credit card debt?and home mortgages.Credit Card Payments- APR and “minimum payments”An annual percentage rate (APR) is the annual rate charged for borrowing or earned through an investment, and is expressed as a percentage that represents the actual yearly cost of funds over the term of a loan.The smallest amount of a credit card bill that a consumer can?pay, to remain in good standing with the credit card company. Making the monthly?minimum payment?on time is the least a consumer needs to do, to avoid late fees and to have a good repayment history on his credit report.Why is it important to avoid high APR credit cards and to avoid making low minimum monthly payments on credit card? Use the following credit card calculator Assuming you are $5,000 in debt calculate the following:If you have an APR of 12%, and you are paying 12% in monthly minimum payments. Monthly payment: ___________How long it will take to pay off: ___________Total Payment: ___________Total interest payment: ___________Assuming you are $5,000 in debt calculate the following:If you have an APR of 24%, and you are only paying 4% in monthly minimum payments. Monthly payment: ___________How long it will take to pay off: ___________Total Payment: ___________Total interest payment: ___________ ................
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