Mitchell D. Weiss is a former banker who now teaches personal finance at the University of Hartford. His new book, Life Happens: A Practical Guide to Personal Finance From College to Career, is a primer on launching a sound financial life. Here, his tips for parents on how to debt proof your kids and other smart money moves they should make.
Credit Reports, Credit Scores
"The bottom line with credit is you don't want to use it unless you have to. There are a couple of fallacies being promoted in our culture. Number one is that you have to establish a credit record. Yes, that's true, but you should not borrow money just to establish credit," says Weiss, who advises, "Instead, get a credit card, to demonstrate that you can obtain one and manage it responsibly.
"Here's a second fallacy - that your FICO or credit score is everything. Kids hear that they should be actively managing their FICO score. When I worked as a lender, I didn't care about the FICO score because it's a snapshot in time. For rapid response lender, like a credit card lender who makes the decision based on the absence of derogatory information, FICO is important. But for more serious loans, for a car or a house, lenders use a credit bureau report. They want to see how the customer has managed credit over time.
"I tell students and parents, let the FICO be. If you manage your money properly, it'll be fine. There are five Cs of credit that everybody follows: collateral, character (credit bureau report), conditions (your human capital - a secure job, education, etc.), capacity (your cash flow or ability to cover monthly payments), and capital (how much money you have in the bank). If you want to debt proof your kids, know that the financial life they live will play out in their credit bureau reports and ultimately credit scores.
Ins and Outs of Student Loans
"There are rules of thumb for the amount of indebtedness anyone should take on. Your mortgage or rent shouldn't be more than 25% of your gross salary. Monthly payments on your total debt should not be more than 30% of your gross salary. Student loans should not be more than what you expect your first year gross income to be. If you expect to earn $50,000 when you get out of college, you should not borrow more than that amount.
"It's important for students to own that monthly payment while they're still in school, to understand that when they get out of school, they'll have this bill to pay. As a rule of thumb, to figure out your monthly payment on a 15-year student loan, multiply by .9. If you borrow $40,000, it would be $360 a month. Kids are putting off marriage or buying a house because student debt is crowding out other possibilities.
"The second guideline on student loans is not to borrow from anybody but the government. Government loans are the cheapest and most flexible. Private lenders are more expensive and tougher.
Keep Private Things Private
"Parents should teach kids to protect credit. Don't share PINs with friends. Don't say, 'Here's my card, take out 50 for me.' Don't leave your checkbook lying around. Don't share your social security number. Last week on campus I heard a kid giving out his social and date of birth on a cellphone with lots of people around him. Don't turn over this info readily - the only people entitled to it are people who are giving you money or storing it for you. Lots of companies ask for last four digits of your social security number as an identifier. I demand a different one.
"Kids store a lot of information on cellphones, which are becoming digital wallets. Make sure your kids password protect and encrypt their smart phones. If they use a cellphone to facilitate payments, make sure they link the payment with a credit card, not a debit card or cellphone service carrier. You have chargeback rights on a credit card - if you see a charge that isn't yours, the provider must remove it from bill until resolved. If it's a debit card or your cellphone carrier, the money is gone, and you have to negotiate to get it back."
Learn more about personal finance from Life Happens by Mitchell Weiss.