Credit scores: Advice to a college student

What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
1. Studying versus working
2. Student credit card question
3. Dealing with extra income
4. Preparing for job review
5. Pension or Roth?
6. Living frugal versus organics
7. Which debt first?
8. Retirement advice for dad
9. Charged-off debts
10. Dealing with rewards points

A few weeks ago, I was thinking about purchasing something expensive that I had been saving up for (the actual item is completely irrelevant). I was shopping online for it when I discovered that a person I’ve communicated with many times in the past was having some very deep personal troubles. His child is very, very ill and they have extremely poor health care, all of this coming during a period of career uncertainty.

Rather than buying the item, I decided to wait. Instead, I sent my friend a few dollars to help out.

In the end, what’s more important: some material item I don’t really need or the welfare of a friend when they’re really in a bind?

Q1: Studying versus working
I am 21 years old, and I live in Israel – which means I did 3 years of mandatory army service. I am about 6 months out of the army and am currently working at a fair (for my age and education level) paying job. I want to study Computer Science at the local university, but the tuition is about 10,000 NIS per year. My parents told me they would pay for my first year, and the money I got after leaving the army will pay for another one. Now, university applications don’t start until march, so I definitely have a few more months to save money, and that will pay for the final year.

But to get to my question – I got used in the last few months to being financially independent. In Israel it is not uncommon to live with your parents even until the age of 30+, so it’s not really embarrassing for me to be living at my parents’ (side note, I’m living with my girlfriend), but I would feel really bad have I had to start relying on them for money again. So I my dilemma is this: should I start college next year, and go back to asking for money from my folks, or keep working for another year and save enough money to take care of my needs for at least the first year of university (the hardest one), thus postponing the beginning of my “real” life.
- Matt

Sit down and talk with them about it. You have demonstrated that you’re independent at this point, and they’re probably thankful for that. Talk to them as an adult.

Lay out the whole situation and ask them what they think about it. It may be something they want to do or it may be something that they’re reticent about – you should be able to figure this out from the conversation.

I think, more than anything, this comes down to your parents’ situation and whether they feel they should help you or want to help you or whether they view you as an entity that they have no obligation towards or desire to help. Neither reaction is wrong per se – it really depends on your relationship and their situation.

Q2: Student credit card question
I’m a college student that has pretty good credit because I have a car loan (although I split the payment with my parents.) I’ve never been late on it, I’ve had it for a little over a year and I’ve checked out my credit report and score and everything and its at least 650-700. I also have student loans out which I know impact my report even though I haven’t started paying them yet. (I’m only a sophomore.) But I know I need to build even more credit and I’d like to get a credit card so I can boost it even more. I’m really only planning on using it for gas and maybe the occasional meal out or normal necessities. I’m thinking about the Discover More card or the Amazon Rewards card. I do plan on paying it off in full every month as well. I just have no idea which to apply for and I’m nervous to even start applying for fear of picking the wrong one or possibly getting denied.
- Ashlee

If you’ve checked your credit score, shouldn’t you know exactly what it is? My guess is that you used a FICO estimator rather than actually getting your score.

Anyway, if you’re going to apply for a card, I’d choose one that gives you bonuses based on your normal behavior as it is right now, not based on how you think you might behave in some hypothetical future. If you buy gas at BP, get a BP card. If you do a lot of Amazon shopping, get an Amazon card.

Don’t sweat getting declined – if your credit score really is that high, you’ll be issued a card.

Q3: Dealing with extra income
My wife and I have been living together for about a year and a half now. We moved from the West coast to Omaha after graduating college because of a job I got out here. Since then, we’ve been working hard on building our emergency fund/liquid savings. Between saving and a couple of small windfalls that have come our way, we have saved a little over $20,000 in an ING savings account. Aside from that, I have about $6000 in my 401(k), for which I contribute 5% of my paycheck and receive the full company match.

We have no credit card debt. I have two student loans which I am paying back on a ten year repayment plan. Once has a balance of $14,800 at 6% and the other, 7,200 at 6.1%.

As for other goals, we are planning on taking 9 months to a year off in several years to travel. The plan is to have enough save to do this and still have 10-15,000 left in savings when we come back. We are not entirely sure how much this will cost, but I anticipate we would need at least another 10,000 saved. Aside from that, we want to purchase a home eventually, but that’s likely not going to be for at least ten years (we are both 23).

So, our month to month financial situation is that we spend $500 to $800 less than we earn, depending on the month. Aside from continuing to save for a trip, where else could we put our money? I have toyed with the idea of contributing more to my student loans, opening a Roth IRA for my wife (she is a student and doesn’t have any retirement account set up), or some other type of investing. What would you suggest?
- Jeff

Whenever someone asks a question about what they should do with extra saving or investing dollars, I respond with the same general thing.

Set some goals.

Sit down with your wife and talk about where you want to be in five years. If you like where you’re at and want to simply retain it with more robustness, I’d pay off the debt. If you want a more secure retirement so you feel safe switching jobs later, I’d build the Roth IRA. If you want a home, I’d start saving cash.

Your goals lead what you do with the money.

Q4: Preparing for job review
I’m writing to you looking for some advice as to what I can do to prepare for an upcoming Job Review (1 year). I feel like my job is going well, I am liked by those around me and I feel like my employers value me. However, I also feel like they don’t care how much work they give me – they just pile it on day after day with no regard – thus deadlines are stretched and my stress raises. I don’t feel like I am compensated fairly, but I don’t know if a raise is in my future or not. I suppose my question is: what do you suggest, if anything, to do to prepare for a job review?
- William

It depends heavily on your workplace. Is it a workplace that deals with candor well or not?

Based on your comments, it sounds either like your workplace doesn’t handle candid discussions very well or that you’re nervous bringing them up. If it’s the former, you’ll want to tread carefully, as people can view candor in such situations quite negatively. If it’s the latter, you need to bring this up if it’s bothering you.

This sounds like something that is negatively impacting how you feel about your workplace and thus impacting your performance. If that can easily be brought up in the workplace, it needs to be. Both you and your employer are losing because of this situation.

Q5: Pension or Roth?
I am a 25 year old police officer. Our current statewide retirement system takes a portion of our weekly pay and places it into the state account. For example, my gross pay this year is currently at $83,126 (I work a large amount of road details) and they have taken out $7730. When retirement age comes due at 45 years old we receive a portion of our top 3 years of salary, and I expect to be receiving somewhere in the range of $70,000 per year plus a new second career income.

In addition to the pension, I have a deferred compensation plan set up that I contribute $50.00 a week to and have done so since I started work. Due to raises the last three years in base pay I plan on starting a Roth IRA with the same $50.00 a week contribution.

Gross Pay – $83126
State Pension and Def Comp – $10030
8.28% contribution

You have told most people to contribute somewhere in the range of 10 percent to retirement savings. Do I add the deferred comp to the pension money that is taken out or should I contribute in addition to it with more in a Roth IRA? Does my pension put me in a different group of people who should look at retirement savings completely differently?

I currently own a home, have adequate emergency savings, and contribute extra payments each month to my mortgage.
- Ryan

I never, ever fully trust a pension. I usually view a pension as something that’s frosting on the cake if you get any when you retire.

Given that, I would at the very least fully fund a Roth IRA in the coming year. I think that’s your best route for retirement savings at this point.

Never, ever rely on a pension. I’ve seen far too many “guaranteed” pensions vanish out from under the feet of people who relied on them.

Q6: Living frugal versus organics
Anyway, my question is, how do you balance living frugally and using organic/vegan foods and products? Do you buy all organic foods? Beyond produce, how do you decide what is worth paying more for organic?

Do you and your family use organic personal care products, like toothpaste, shampoo, body wash, and deodorant? If so, do you have any recommendations? This is a new idea to me, and its a little overwhelming to change everything, but it makes a lot of sense that we absorb too many chemicals into our body through our skin.

Another idea that I’ve seen on other blogs is making your own deodorant or using baking soda as shampoo. Have you tried any of these ideas, and what do you think of them?
- Maria

I’m not too worried about buying everything organic. I buy organic when the prices are reasonable in comparison to the non-organic items. For some foods, like seafood, the organic label doesn’t have a ton of meaning.

As for organic personal care products, you’re really getting into an area without a specific meaning there. I just recommend reading the ingredients and picking up only products where you understand what’s in them.

I’ve tried various replacements for toiletries and none of them are all that great without significant work. We’ve made our own soap on occasion to great success.

Q7: Which debt first?
I will be coming into a two part windfall this winter when my company distributes profit sharing (allegedly, 33%). I should be receiving roughly 10k this December (post tax if I choose no additional retirement distribution) and another $3,500 in March. I make 55k annually and am doing well enough at my 25 years of age. I purchased my home in August 09 and currently owe 101k on a 30yr note at 5.25% interest. I have 3 student loans consisting of the following:

Loan 1: Fed Stafford, Balance: $2800, Rate: 2.6% now, 3.25% later fixed (in deferment due to me finishing Grad school this December)
Loan 2: Fed Direct, Balance: $12,500, Rate: 6.8% fixed (in deferment too), Payment: $143 (10 yr)
Loan 3: Private student loan, Balance: $8,800, Rate: 3.1% variable (based on LIBOR average, has been high in better economic times), Payment: $51 (15yr)

I currently have 10k in in my emergency fund savings account, 32k in my 401k (saving 10% pre-tax with a company match of 1.5%), own my 2008 Dodge Charger free and clear, and luckily have zero credit card debt. I am single with a serious girlfriend who I could marry in the next two years, but that money would come from my monthly savings and a bond she has with for that purpose.

All that said, which loan (2 or 3) should be paid off first? I’m leaning towards 2 since i’m not paying it currently (although it is in the budget, that money is just saved instead) and it is locked into a high interest rate, but want your opinion on the matter (as well as any other option I’m not considering). What should I do?
- Drew

You should always pay off the loan that has the higher interest rate at the moment first, so I would go with #2 as well.

The only exception to that would be certain loans where if the rate adjusts you’re going to have to pay the back interest (like some credit card balance transfers). In those cases, I would pay the one with the highest adjusted rate first – but that’s not the case here.

Don’t worry about what might happen with things like this. A bird in the hand is worth two in the bush.

Q8: Retirement advice for dad
Background: My dad lives in San Diego and is 63. He recently retired from the Coast Guard and after splitting it with my mom, his ex-wife, gets a monthly payment of $1000. He also got a one-time payment of about $25k because he delayed retiring for 3 years and it piled up. He plans on retiring from his current job at age 66 to get maximum Social Security benefits, which we think will be about $1000 per month. His current job retirement will give him about $1000 per month too, but we’re unsure if he has to split that with my mom. I think he has about $85k in a (government?) Thrift Savings plan offered by his employer, the VA, which he still contributes to but not sure about matching. Finally, I think he has about $15k in liquid savings. Luckily, he’s good at discussing these things with me!

He needs to get some major dental work done over the next 2 years that will cost between $6,000-$8,000. It might go down a bit due to new insurance though. He does not own any property and pays rent of about $800 per month. He owns his car but takes the bus to work at least 2-3 times per week. Dad thinks he will drive his current clunker until it breaks down completely and then buy another used car with cash. He has minimal normal bills like cable, internet and utilities. He also travels about twice a year to visit family, maybe $750 in airfare. He has a secured credit card b/c he sometimes forgets to pay bills and will not listen to my talk of automatic payments. He is on my cell plan and I pay it. He’ll probably move to the east coast when he fully retires and applies for Social Security, maybe near me in Raleigh, NC, to save money and be closer to family. Also, his side of the family usually lives into their 90s and he seems to be on that track. I think his credit score is probably good, although I can’t be sure due to bill payment forgetfulness. Although thrifty, he has problems managing money.

What should his next step be? What should he do with the monthly Coast Guard payment for the next 2.5 years? The Coast Guard windfall? Any changes to his savings plans? Final resting place plans? Long-term care plans? He would like to give some money to an education savings plan for my 18 month old niece too. Any advice is greatly appreciated.
- Shannon

I think he’s doing pretty well other than the bill forgetfulness.

The best things he could do for his own future would be to just bank as much as he can until retirement into something stable – even a savings account would work. He should also really work on that bill paying forgetfulness, perhaps entrusting someone else to handle such bills for him. This will be important when he moves, because many rental managers look at a person’s credit rating before deciding whether to rent to them.

The only thing that really concerns me are the hints of forgetfulness, and that’s something that his pride may prevent you from helping with.

Q9: Charged-off debts
I fall into the “young professional” category of having a negative net worth since I owe more in student loans than I currently have in assets. My question is about charged off accounts/debt on my credit report…these charged off debts are credit cards amounting to less than $5k and medical bills amounting to at least $5k with misc accounts here and there for smaller amounts.

Should I add those to my debt list and try to pay them off if, once paid, they are not removed from my credit report? Or, should I leave them unpaid and wait for them to fall off my report once the 7 year mark is reached? Most of the debt has about 2-3 years left to “fall off”. I rarely hear personal finance advice about old charged-off accounts/debt so I would appreciate your advice.
- Lacey

It depends on whether you want to do the honest thing (paying debts you incurred) or the thing that’s best for your credit history (not paying them).

This is a situation where honesty is not rewarded, and I actually think it’s really messed up. If you have a debt you haven’t paid and then you are able to pay it off and do so, it should benefit your credit history. Quite often, on old debts, doing that hurts your credit history.

You have to answer the honesty conundrum yourself. It’s not something I can tell you – you have to ask yourself.

Q10: Dealing with rewards points
I currently have about 17,000 reward points for my credit card. I get approximately 1 point for each dollar spent on the card. I use my credit card for a lot of purchases and expenses for the very reason of getting the points and then redeeming them for cash. (Don’t worry, I pay the full balance every month.) My question is how long should I wait to redeem the points for cash?

I can redeem 15,000 points for $120 cash ($.008 per point). The next opportunity to redeem points for cash is at 20,000 points, which provides $160 cash (still $.008 per point). After that the next step is 25,000 points, which are redeemable for $250 cash (a bump up to $.01 per point). In the past I’ve accumulated a bit more than 1,000 points per month, but because I’m trying to reduce my spending overall (thanks in part to your blog) that came down to just over 900 points last month (a trend I hope to continue). Hopefully it won’t be up up to 1,000 points again or at least not regularly.

My savings account is an online account through Capitol One with a 1.30% APY rate (if you can suggest somewhere safe with a significantly better rate I’m all ears).

Given all this information, should I redeem 15,000 points now and put the $120 in my savings account, or should I hold out until I get to 25,000 points, which could be at least 9-10 months from now?
- Tanner

A bird in the hand is worth two in the bush. I would cash in the points immediately.

Why? Let’s say you lose your job and are unable to pay a bill or two. The balance builds up. The bank decides to cancel your card. Boom – you have nothing.

There are any number of reasons why you wouldn’t be able to get the bigger amount. The program might change. The points program might be dropped altogether.

If you can get that rewards cash now, get it.

Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag. However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.

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