Guide to responsible credit card use in college
Healthy spending habits can help ensure a secure financial future
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College is a time for “firsts.” Typically, it’s the first time you move away from home, it’s the first time you manage your own school schedule and the first time many apply for a credit card.
While credit card issuers haven’t been allowed to advertise directly to students under the age of 21 on or near campus since the CARD Act of 2009, students are still often encouraged to begin building credit throughout their time at university.
Today’s economy basically runs on credit. You need it to apply for a loan, rent an apartment, buy a car, by a house, start a business and more. Your credit score will also determine your interest rate on loans and credit cards, which significantly affects how much you’re paying for large purchases. It even affects how much you pay for home and car insurance.
Importance of responsible credit usage
The financial habits you establish in college, including how you use credit, follow you long past graduation.
Irresponsible spending could mean years of paying off debt (on top of your student loans) with high interest rates. It could also destroy your credit score, which can take a long time to recover from. A bad credit score due to racking up debt and late payments throughout college could mean denied loan approvals for a new car, mortgage or future small business. Even if your loan is approved, your interest rates could be sky-high.
It can take years of responsible spending to fully recover from a damaged credit score or the limitations that massive amounts of debt put on a budget.
Realistic, healthy spending goals
Developing a healthy relationship with your finances early on is the best way to set yourself up for success as you graduate college and find yourself thrown into a world filled with mortgages, student loan debt and balancing multiple credit accounts.
No one expects you to perfect the financial game before freshman orientation; setting yourself up for financial success is an ongoing process. Here are a few habits you can start now that will carry you through graduation and beyond.
Don’t spend more than you can pay
Studies have concluded that it is harder for consumers to rationalize a purchase with cash than with credit. That means credit cards can make it easier to justify overspending. “I can just pay it out over the next few months” is a phrase repeated far too often.
While this is probably the hardest habit to establish, it’s the most important: Do not spend more than you can pay off at the end of the month. Budget your expenses and know how much you can put toward that credit card statement. Be diligent not to overspend.
James Polland, a career coach and owner of TheAdvisorCoach.com, advises students to “equate your purchases with the amount of work required to pay them off.”
“Credit card companies know that you don’t experience as much pain swiping a piece of plastic as you do physically handing over cash,” Polland continues. “Think about the time you’re trading for a particular purchase. If you make $20 per hour and want to buy $800 speakers with your credit card, consciously realize that it represents 40 hours of work. It helps you put things in a new perspective and helps you avoid making impulse decisions.”
Setting up autopay, purchase notifications and downloading budgeting apps can help you stay on track.
Always make more than the minimum payment
Sometimes, overspending happens. Your car breaks down and you have to pay for parts, a professor hints that this “optional textbook” that you hadn’t budgeted for would help you pass the class or an emergency happens where you have to fly home unexpectedly. Other times, you may have a minor meltdown and can’t take cafeteria food or ramen anymore, so you splurge on a nice meal.
When this happens, don’t beat yourself up about it. Pay off the balances as soon as possible to keep interest charges at a minimum, and always pay more than the minimum required payment on your statement.
Know when to swipe
Credit cards are great weapons for your financial arsenal, but they aren’t the best choice for every purchase.
Tuition? Not a great credit card spend. Student loan interest rates are almost always much lower, and you won’t have to worry about paying those back until after you finish with school. Gas money, on the other hand? It’s a budgetable expense that you can pay off at the end of the month, and you can even earn some great rewards depending on the credit card you use.
Knowing when to swipe, when to consider a loan and when to pass up the purchase to save money is a skill you’ll need throughout your life.
Stay on top of your credit score
Most credit card issuers have built-in credit monitoring that gives you insight into your credit score each month. While small fluctuations of your score aren’t something to worry about, large dips can be a sign of unhealthy spending or errors on your account.
You can use your credit card’s app to check your score, or you can use a free online service such as our credit monitoring tool.
Utilize rewards
Aside from building credit, the best reason to use credit cards responsibly is the reward potential. Whether you have a cashback card that you use to reduce your monthly bill or a travel rewards card that can help pay for your holiday trip home (or spring break trip to the beach), know the ins and outs of earning and utilizing the rewards your card offers.
Choosing the right card
With hundreds of credit card options, finding the right card for you can be overwhelming. While no credit card is perfect, research can help you make sure the card you’re applying for will provide value throughout college.
Here are a few things to look at when researching credit cards:
Some cards charge an annual fee that is applied to your credit card statement. While some issuers charge less than $100 (the Chase Sapphire Preferred, for example), others can get up toward $400. While avid travelers or small business owners spend enough annually to make the annual fee worth it, you should probably look at a card that has a low annual fee or no fee.
If the card you’re considering has a manageable annual fee, make sure that the rewards you reap are worth the extra cost. How much do you estimate you’ll be purchasing with the card each year? Do the rewards you’ll get from those purchases outweigh the fee? Can your budget spare that money?
If you aren’t sure about the answers to those questions, your best bet is a card with no annual fee.
Many credit card issuers offer free credit-monitoring capabilities with their cards. Look for a credit card that allows you to access your FICO® scorecard and other benefits such as identity theft protection and fraud alerts.
APR stands for annual percentage rate, and it determines how much interest you have to pay for purchases you don’t pay off at the end of each month. Because students typically don’t have a strong credit score, many student credit cards can have a higher APR to help issuers balance the risk.
Many credit cards also offer a 0 percent APR intro bonus to attract customers. Intro periods usually only last between six months and a year, so make sure you know what you’ll be paying in interest once it’s over.
Alternative options
If you find that you’re not approved for any student credit cards, or if you’re just wary of getting into debt, there are other credit-building options.
Become an authorized user
Family members can add you as an authorized user or additional cardholder on their credit cards. Then you can reap the benefits of their strong credit while you slowly build your own. You can make one or two smaller purchases each month that are easily paid off to establish your credit without putting a dent in your budget.
Just make sure to go over the “ground rules” with whomever pays the bill each month. Know how much you are allowed to spend and whether the primary cardholder will cover those charges or if you will be responsible for paying that person back for what you buy.
Secured credit cards
Secured cards require you to pay a refundable deposit, usually several hundred dollars, that acts as your starting credit limit. For those looking to apply for a rewards credit card after establishing credit, a secured card can be a great starting point.
Just make sure that the issuing bank reports your credit behavior to the three major credit bureaus. Otherwise, your healthy credit habits won’t be reflected in your credit score.
The bottom line
For better or worse, the American economy relies on credit. Understanding how to use credit responsibly can help you graduate with less debt, and a high credit score will help you postgrad when you try to buy a house, start a business and more.
Furthermore, the credit habits that you establish now will set the stage for how to handle credit and budgeting throughout your life.
“Don’t be afraid of credit cards,” Amanda Abella, finance expert and author of Make Your Money Honey, advises. “If you can start to build credit in college, you will be much better off financially.”