Credit Card Tips for College Students
Build a good credit score and maintain low debt even in college
A recent report by Sallie Mae reveals that the average college student has more than four credit cards with a combined balance of more than $3,000. Some students have as much as $7,000 in credit card debt. Graduating with that much credit card debt can put a damper on your plans for entering the real world, especially if you've missed payments or defaulted.
Why good credit is important
Your history using credit cards is compiled into a credit report and graded with a credit score. Lenders, employers, landlords, insurance companies and even utility service providers all use your credit report or credit score (or both) to decide whether to approve your applications and at what cost. See Credit Report and Score Overview.
Having too much credit card debt can leave negative marks on your credit report and drive your credit score down. If you have a history of missing payments, it will also decrease your credit score. This could keep you from getting a loan or apartment. A landlord may require you to have a co-signer. An employer may not hire you. Utility services may require a hefty security deposit before turning on services.
Having a good credit history is important, especially when you're just starting out on your own. Whether you have that good credit history depends on how you use (and don't use credit cards) during your college years.
College Credit Card Tips
Don't let a credit card choose you. Unless you're sure it's a good deal, don't sign up for a credit card just to get a free t-shirt or coffee mug. Read through the terms of any credit card agreement you receive. Check the fees and interest rates, comparing them to other card offers you've received. Then, you select the credit card that's best for you. The best student credit cards have no annual fee, a low interest rate, and low credit limit.
One credit card is enough. Though you may be tempted to apply for every credit card that comes your way, it's better to keep your cards to a minimum at this point. Every new credit card application causes a drop in your credit score. Plus, the more credit cards you have, the higher the risk of you taking on too much credit card debt.
Only charge what you can afford to pay. Until now, you've probably assumed credit cards were meant for charging things you can't necessarily afford right now, but will probably be able to afford later. Using a credit card when you can't afford to is the quickest way to build a balance you can't repay. The minimum payments that make it "easier" to off a balance, actually make it more expensive. You could end up paying $100 for a $20 pizza.
Pay your balance in full every month. If you get in the habit of paying off your balance when you get the bill, you'll avoid carrying credit card debt. Plus, you'll only pay for what you purchased, not the extra fees credit card companies charge when you don't pay in full.
Don't even think about a cash advance. They're not as attractive as they seem. You'll pay a 2-4% cash advance fee plus finance charges on the cash advance which probably has a higher interest rate than your purchases. And if you have a purchase balance on your credit card, your monthly payments get split up between the balances.
Stay under your credit limit. Not only are over-the-limit fees expensive, they are also hard to get rid of. Because of the way billing cycles and payment dates fall, you might think you're paying your balance under the limit, but finance charges and fees take it right back over. The best bet is to keep charges within 10-30% of your credit limit.
Make your friends get their own credit card. If you let someone else use your credit card, you're responsible for paying the charges whether they pay you back or not. After all, it was your signature on the credit card application, not your friend's. Even the best of friends can turn to frenemies in a matter of seconds, so it's better not to mix friendships and finances.
Don't be afraid to close the card. Normally, I tell people not to close their credit cards because of the damage it could do to their credit scores. But, if you don't have the money to pay a credit card balance and you know you'll be irresponsible with your card, it's better to close the account than to ruin your credit score. Closing a credit card probably won't damage your credit nearly as bad as a credit card default.
Don't expect your parents to bail you out. Once you become independent, it's your responsibility to pay for your credit card charges. Your parents have their own bills to pay and retirement to save for, so it's not fair to expect them to pay for your credit card mistake. If you run into trouble, you can ask your parents for a loan to pay off the balance. In return, you should cancel the credit card, come up with an agreement to repay your parents, and resolve to never get into credit card trouble again.
Credit card companies don't give you a manual on using credit cards the right way. In fact, they'd rather you make costly mistakes so they can charge you more interest and fees. Follow these tips to keep you debt free and creditworthy.