Money U Part II: Master the Loan Lifecycle

About the Episode

As students start college and are likely living on their own for the first time, they’ll be met with plenty of options from lenders. According to WalletHub, 85% of college students already have a credit card. It's tempting to keep accepting new credit card and loan offers, especially with the freedom to make big purchases. Cristina and Randy are sitting down with Gabrian Calkins, Assistant Manager of Consumer Lending at Addition Financial, for some expert insight. 

Credit Cards

11:21

Cristina asks Question 1: “What advice would you give especially to younger students entering college when they're confronted with, ‘Hey, you can get an extra 20% off a credit card?’”

Gabrian responds: “Lots of different offers will be coming in, especially when you hit 18. So, that's typically the big indicator for banks and credit unions to start sending you things. Be very careful with what you're signing up for. Especially when you're at the 25% off or the 20% off stores.”

Gabrian follows up: “You want to make sure that you're asking all the right questions. Before you just say yes, you want to be mindful of the credit limit that you're being offered. You want to understand if there are different fees that are associated with that card. A lot of times there will be an annual fee or an application fee. Those are all things to ask. You want to know if there's a benefit to using this card. If it's just 20% off that one time, or, is it something where, if I get gas with this card, I get 3% back? So there's a whole bunch of different things that you can ask and actually look into before you say yes to all of these cards. One of the other things is there's tricky language in there that might be a pre-approval or it might just be an invitation to apply for this card.”

Randy asks: “What's the difference between a pre-approval and a regular approval?”

Gabrian responds: “A pre-approval means that they've already screened you and they know that yes we can offer you something. Sometimes with student cards they can come in and say ‘Yep, we'll approve you.’ Military I've seen as well. So they will come in as long as you have a job or these qualifying indicators. Then they will approve you for, let's say $500, something like that. A very low limit, but you'll still get that approval.”

Avoiding Debt

16:04

Randy asks Question 2: “What are some guidelines for students to avoid that credit card debt?”

Gabrian responds: “Once you get a card, the first thing you want to do is start using it, but be very mindful of what you're using it for. So certainly, avoiding credit card debt is very smart. You don't want to say, ‘Oh, I have $500. I'm going to max out $500.’ You don't want to do that. So, essentially, you want to keep your balance paid off if you can. Worst case scenario, you don't want it to go above a 30% mark.”

Gabrian follows up: “Yes, use your card. Pay it right off. But if for some reason your hours were cut for that week and you don't have the funds, watch that balance. Make sure you're only spending what you absolutely can pay off. Again, that 30% is going to be the absolute maximum that you want on that card. Any higher than that and your credit score will really start to dip. Which is why savings really come into play as well”

Gabrian follows up: “It's called credit utilization. You want to keep that low. That will keep your credit score higher, the less you use on your credit cards. If you pay it off every month or don't have a balance there. Some of the other things that you want to make sure that you're doing is that you're paying on time. And of course, in full. Then you really want to think about what you're going to use your credit card for when you're in this planning stage. So, okay, I just got my credit card. Let me really set some boundaries for myself. Let me make sure that I'm being disciplined and have that budget. Of course, it's talked about all the time. Are you going to use it only for emergencies, or are you going to only use it for gas purchases? Are you only going to use it for $50 when you go get groceries? That kind of thing. Keep it in your budget so that you know that payment is coming.”

Randy asks: “So what happens if you just get the credit card and you don't use it?”

Gabrian responds: “Eventually your credit card would be closed by the company that gave it to you for inactivity. So, you do want some activity on your credit card. Again, just keep in mind if you can make those payments.”

Loan Applications

24:45

Cristina asks Question 3: “So got the credit card. And now I'm getting my car. Walk a young person through what that looks like. That's the first loan a lot of people sign. How do you do that?”

Gabrian responds: “So a lot of different things go into play. You want to make sure that you're researching. For me, research is where it's at. I know that does not come naturally to some people, it's not their desire to do that. Call in somebody, don't just go in blind. Some of the conversations that I have when I'm in my position are with the branch staff that work with members that are walking in and asking what we can offer them? How can we have this discussion with them? Go to a local financial institution, whether it's Addition Financial or wherever it is that you have your funds. They have people there that know what they're talking about.”

Gabrian follows up: “One of the first things – you want to know what your credit score is. You want to be able to monitor that. There's so many different things that make that score up, but it would be on time credit card payments, not carrying a large utilization, those things.”

Gabrian follows up: “Understand what your budget should be. Make sure that you're not going to overextend yourself, so that you can make those payments. You certainly want to look at other lenders and find out who the best rates would be through, which can be difficult. A lot of websites say 'as low as,' so that can be hard. Go in and talk to someone, call the local credit union, ask them what their rates are, have a conversation, make an appointment. Understanding what your credit score is will put you in a good position to know what your rate should be."

Gabiran follows up: “One of the benefits of being able to go in and talk to someone is that you can actually apply for a pre-approval, so then you have the power to be able to go to a car dealership and say, this is my budget, this is how much I can spend, and you already know what your payments are going to be. There are no surprises and you already know what your credit looks like. You know what your interest rate is, so you're not going to go and be overwhelmed with the entire car buying experience. Plus, there's so many things we can do online now.”

Gabrian follows up: “Really investigating that specific vehicle. That will certainly help you as well. Some of the other things you have to remember are insurance costs. Usually on these websites it has the VIN number of the car you like. You can put that into any insurance website and actually get a quote for that specific car. So I do that before I even go to the dealership. So I find out, is my insurance going up? Is my insurance going down? So those are some things certainly to keep in mind.”

Secured vs. Unsecured Loans

33:47

Randy asks Question 4: “I'm still a little confused on secured versus unsecured loans. What does that mean?”

Gabrian responds: “Essentially, a secured loan means that it's secured by something. It's called collateral. So it might be a car or a house. A house has a mortgage that has collateral. You can have a loan with your savings account, money put on hold and that's the collateral. So it can be share secured.”

Gabrian follows up: “There are some benefits to that. Typically with a secured loan, your interest rates will be a little bit better. You may also have a better chance of approval with a secured loan. You have to think about if I'm going over to Randy and saying, ‘Randy, can I borrow 20 bucks?’ He may never get that back. But if I say, ‘Hey, hold on to my really special pen for $20, then you could keep my pen that's worth $20, and I would keep the $20.’ So you could take something back from me in place of that loan.”

Gabrian follows up: “Because your funds are being held, I feel like you have a little bit more skin in the game. Definitely, I want to pay that back. I want to make sure that my bank or my credit union doesn't take that money from me, because they could if you decide not to pay what you're borrowing. But that will increase your credit score and it reports to the credit bureaus just like a regular credit card would. So it'll show on there your payment history and again your utilization.”

Loan Mistakes to Avoid

36:18

Cristina asks Question 5: “What are the biggest mistakes that students could avoid when applying for an offer with a lender?”

Gabrian responds: “You definitely want to be honest in your application. If you're only making $300 a month, make sure you put that down. Anything overstating, saying, 'Yeah, I make $5,000 million a month,' that would put you in a very bad position. The bank or credit union is going to take that information from you to see how much you can afford to borrow. So you don't want to overstate that and inflate it and then get yourself into trouble because you can't pay it back, because you're not making that. Some of the other things you want to make sure of are the fine print – you want to see what it is that you are signing up for and you want to ask questions. Keep your documents so you can refer back to those. If you see something that is an extra charge, you can always ask, ‘Is this required?’ Because that's an indicator that if it's something that is optional, they have to tell you that.”

Gabrian follows up: “And it can be very confusing. A lot of those documents are absolutely 100% non-negotiable. You have to sign them if you want the car, if you want the credit card, those kinds of things. However, again, they may slip something in there, if you didn't know you were purchasing a warranty that you may not need. You want to make sure you understand what it is that you're purchasing.”

Making It Count Essentials

50:07

Randy asks Quick Question 1: “Is there a certain number of credit cards you recommend students limit themselves to?”

Gabrian responds: “Easy question, but it's a hard question. Four is a good number, but you don't want to carry balances on all of them. If you know that you're going to be carrying a balance, again, 30% of the entire limits. Now, if we're talking about more than one card, keep it under that. But maybe start with just one to test your self control, see how you do. Then after a couple of months, you can trust yourself, go ahead and do a little bit more.”

51:00

Cristina asks Quick Question 2: “So we talked about the loan application process. How long does that typically take?”

Gabrian responds: “This one, it can vary. It depends on so many different things. So it depends on what kind of loan you're looking for right. Mortgages can take forever. If you're just talking about a credit card or a car loan, it can take just a couple days to maybe a couple hours, depending on what kind of documents you may need. A lot of times when you're first starting out, your financial institution is going to ask for proof of income. You want to make sure that you have those things ready. So when your representative from your branch reaches back out to you and says, 'We may need these things,' you have them ready to send right away. It might be tax returns or just the last couple pay stubs, those kinds of things.”

52:44

Randy asks Quick Question 3: “Are there any common hidden fees that students should be aware of before taking out a loan?”

Gabrian responds: “Yes. So there can be annual fees. You definitely want to know about that. You want to know if there's higher interest that will be applied if you miss a payment or if you're late on a payment. Sometimes that can happen, your interest rate can go up. Sometimes there's application fees. There may be late fees if you forget a payment. I am a huge advocate for ‘set it and forget it.’ Set up those automatic payments if you're not going to sit in the car after pumping gas and pay it right off.”

53:36

Cristina asks Quick Question 4: “What's the first thing I should do if I miss a payment?”

Gabrian responds: “First thing that you want to do is call the company. I have really good credit, but I have missed a payment. Not over my 30 day limit. I didn't get the statement and go, 'Oh my gosh, I forgot to pay.' But I did miss it by a day so I called them up and said, 'Is there anything that you can do?' And more often than not, especially if it's something that's very rare, a lot of companies will say, ‘Absolutely, we'll go ahead and waive the late fee for you. We'll apply your payment right now.’ But it's about communication. You want to make sure that you let them know. And I have found in my experience, if you take responsibility for it, they tend to be a little bit more understanding when you say, ‘Yeah, that was my fault.’ But certainly ask to have the fee waived and see what they can do. The second question would be has it been reported to the credit bureaus yet? So you can ask that question and they won't be able to remove that because it is a late payment. But you can always ask. So at least you know when you're monitoring your credit that it is going to take a dip.”

1:03:18

In this episode, Cristina and Randy highlight one of Addition Financial’s articles, titled Balance Transfer vs. Personal Loan: Which Should You Choose? This is great for listeners who are weighing their lending options to help lower their monthly payments.