If you have a low credit score, how long does it take to get it back up again. Money Matters
Last month, I was a guest teacher for a day for five high school business/finance classes at Brecksville-Broadview Heights High School. We talked about the most important things that kids need to learn about managing their finances, now and in the next few years. I was intrigued by some of the students' questions -- basic yet smart.
As a follow-up, I asked the two teachers who invited me, Kevin Good and Jason Simonetti, to have their students submit more questions to me in writing because I thought the questions (and the answers) would help a wide section of readers.
This is the second column featuring some of their questions:
Q: If you have a low credit score, how long does it take to get it back up?
A: It depends on the reason it's low. If it's because you've made late payments, those will remain on your credit record for seven years. But the impact will subside some in two to three years.
If your score is low because you have too much debt, your scores will increase as you pay down your balances. If you win the lottery and pay all of your bills in one day, your score will be high within a month or so. You don't really get penalized for having high balances in the past.
Q: When do you think it is a good time to start taking care of your own banking?
A: Most young adults need considerable help with managing their bills and their checking and savings accounts. I recommend that a parent have joint ownership on checking accounts so the parent can periodically monitor what's going on.
Once kids have managed writing checks, paying bills and balancing their checkbook for a year or so, then they should be able to handle it on their own. From what I've seen, most kids need help (whether they admit it or not) until at least age 21 or 22.
Q: What is the best interest rate to have for different types of loans (like home and auto loans)?
A: This changes all of the time based on the economy. When the economy is struggling, interest rates are low. When it's healthier, interest rates are higher.
Right now, a good rate for a car loan is about 3 percent. A good mortgage rate is about 4 percent. And credit card rates can vary widely, but typical rates now are 11 to 15 percent right now.
It's important to know the going rates for different products so you don't pay more in interest than is fair. You can check on current rates for different loans and credit cards on the web site www.bankrate.com
Q: Could you explain how stocks work in simple terms?
A: Companies often need to raise money to launch a new product, expand their business or just run their business. In exchange for money
they need, they sell tiny pieces of their company in the form of stock. If you buy stock in a company like McDonald's or Apple or Ford, then you own a tiny piece and have a claim on a tiny share of the company's profits and assets.
People like to own stock in companies that are expected to increase in value. Ideally, you might buy a share of stock for $10, for example, and then sell it within a couple of years for $12 or $15. Or if you own the stock for years and years, you might be able to sell it for $30 or $50. That would be a good return on your investment.
The premise of stocks relies on you being able to sell your stock for more than you paid for it.
Some people buy stocks as a way to make money in addition to their jobs. Many people buy stocks as part of their retirement accounts. People saving for retirement typically buy mutual funds that are made up of the stocks from lots of companies, so there's a better chance your investment will increase in value than if you bought stock in just one company.
Q: Is it common for teenagers/young adults to have issues with credit? If so, how? What can they do to prevent these kind of issues?
A: I don't know that I'd say it's common, but it's not uncommon. The most important thing you can do is to pay your bills on time, especially loan payments and credit card payments. It's a good idea to set up payments to be made automatically from your bank account every month. In the case of credit cards, you can schedule minimum payments (say $25 or $40) to be made automatically, and then you can log into your bank account after you get your bill and pay the full balance. But if you forget, at least you know the minimum payment will be made on time.
The second thing you can do is make sure that you never take on loans you can't afford and never buy things on your credit cards unless you know how you'll pay the bill in full in a timely fashion.
Q: I currently have a checking account and debit card just to deposit my checks into from work and my mom is on my account also as a co-signer. Will this have any effect on my credit score in the future?
A: No. Debit cards don't affect your credit rating and they don't appear on your credit report. The reason: With debit cards, you're spending money already in your checking account. You're not borrowing it from a bank. You build credit when you borrow money and repay it.
Murray is The Plain Dealer's personal finance writer. Because of the volume of requests, she cannot help everyone who contacts her.
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On Twitter: @teresamurraySource: www.cleveland.com