Katy Royal didn’t know her credit score the day she went to a dealership to buy her first car.
Truth is, she didn’t even know what a credit score was or what it meant.
“Totally naïve,” Katy admitted.
Katy bought a car that day, just not the one she wanted. The salesman told her she couldn’t have the SUV she wanted because she had a lousy credit score but he could get in a four-door compact “… that was totally gross!” she said.
Gross or not, she took it because it was the only new car on the lot she qualified to buy. She was about to start a new job in a new city with a nice salary and getting a new car seemed like the right thing to do.
Always Read The Contract
So, she signed an agreement to pay for it, just not the agreement she thought she was getting.
“The salesman told me if I made all the payments for two or three years, I could come back and get whatever car I wanted,’’ Katy said. “Two or three years is normally what you do for a lease agreements, so I figured I was signing a lease.
“Turns out I signed a five-year purchase agreement. I had a car loan at 16.9 percent (interest rate) for a totally gross car that I didn’t even like.”
The naïve moments were not over. She invited her Dad to share this momentous occasion. She thought he’d give her a signal if something was up, but he never said word. On the way home, she asked him how she could have a bad credit score when she didn’t even know what a credit score meant?
His response turned out to be the life-changing moment the day had promised.
“It means your Mom and I didn’t pay off those credit cards and student loans that we took out in your name,” he said.
Whoa! Student loans? Credit cards illegally opened in my name? Bad credit score? That was three-pack of financial zingers she never anticipated.
“I obviously had no idea what was going on with money in our family,” Katy said. “My parents took care of the finances my whole life. I had no idea they were using my name to open credit card accounts and I didn’t know anything about student loans.
“I was financially illiterate.”
Financial Education Needed
She’s hardly alone. Research and surveys paint a discouraging picture of financial literacy in this country. The National Foundation for Credit Counseling and Nerd Wallet’s 2015 survey found 70 percent of Americans worried about their finances. Some of the more depressing numbers from that and other surveys include:
- 60% of adults admit to not having a budget, the most basic element in a financial plan.
- 59 percent of adults spent more money than they made last year.
- 33 percent say they have never checked their credit report.
- One-third of credit cardholders carry a balance from month-to-month. Of that group, 35 million people roll over $2,500 or more monthly.
- 67 percent of college students who took a test on financial literacy scored “D” or “F.” None of the student scored an “A.”
Laura Levine, president and CEO of Jump$tart Coalition, an organization that promotes financial literacy at every level from children through retirement, didn’t argue that some families are in over their heads when it comes to knowing how to deal with money.
“Finance is a lot more complicated than what people expect,” Levine said. “Some people are savvy enough to figure it out along the way, but the idea that you get out of college, get your first job and credit card and then figure it out along the way, really doesn’t work.”
Careless With Credit Cards
That wasn’t exactly what Katy’s parents did with her, but it was close.
Her parents gave her a credit card at 18, told her to “… use it for whatever you want,” and they would take care of the bills. She used it for 10 years on food, clothes and entertainment, spending an estimated $200-$300 a month, but never saw the bills.
Her parents paid them off at first, but then ran into financial problems and made only minimum payments before handing it off to her with a balance of $2,957. She was paying a staggering 28.99 percent interest rate and only could afford the monthly minimum payment of $386 a month.
That’s a drag on your credit score.
Her parents also paid for four years at a private college with student loan money that somehow she didn’t know about. They kept pace with payments for a few years after she graduated, but stopped completely when their own resources dried up.
The student loans went into default with a balance of $14,000 at 8.5 percent interest.
That’s more drag on your credit score.
They also opened cell phone accounts and more credit cards in their daughter’s name, and didn’t pay the bills, even more drag on a credit score.
Protecting Children Too Much
Her credit score eventually bottomed out at 530, not even good enough to get a credit card from most companies.
“That natural inclination for parents is to protect your children and take the pain away from things like paying bills,” Levine said. “But when kids are completely uninformed about finances, bad things can happen.
“Even if you’re just helping them with some of the bills, it’s best to talk about how much their spending, how much they can afford and how that will affect their credit score.”
Fortunately, Katy had a friend who worked at a credit counseling agency and helped educate her quickly. The credit counselor helped reduce the interest rate on the credit cards and urged her to increase the monthly payments to whatever her budget could handle.
That has helped her credit score inched back up to nearly 600 and she still talks to Mom and Dad, just not about finances.
“I’m more aware of my finances now,” she said. “I try to do a good watching my spending, but there are still times when I have to cross my fingers and hope my (debit) card doesn’t get declined. It’s hard, but now I know that I should have learned this stuff a lot sooner.”
Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it in 2012, helping birth Debt.org into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering the high finance world of college and professional sports for major publications, including the Associated Press, New York Times and Sports Illustrated. His interest in sports has waned some, but he is as passionate as ever about not reaching for his wallet. Bill can be reached at [email protected].
- McClary, B. (2015, April 7) Americans Are Overly Confident When It Comes to Finances, Yet Unprepared For The Future. Retrieved from https://www.nfcc.org/press/multimedia/news-releases/americans-are-overly-confident-when-it-comes-to-finances-yet-unprepared-for-the-future/
- NA, (2013, January) College Students are Put to the Test: The Attitudes, Behaviors and Knowledge Levels of Financial Education. Retrieved from file:///C:/Users/bfay/Downloads/Inceptia_FinancialAptitudeAnalysis_researchbrief.pdf