Experience matters when it comes to winning the credit card game. For college students, it can feel like a game with changing rules and unclear directives — spelling trouble for some.
It’s no secret that college is expensive, but there are ways to keep your costs low, build good credit and graduate without racking up piles of debt in the process. Credit cards, when used wisely, offer a bevy of benefits to the responsible borrower. Here are common mistakes that students make when using credit and how you can make your cards work for you, not against you.
Digging a Hole…
With a fresh new card in hand, you might be tempted to treat your dorm hall to pizza or splurge on the latest pricey tablet – for educational purposes of course. Before you start charging up your new card, understand how the interest rate works and what it will take to pay off your purchases. Most card issuers outline this information on your monthly statements. That $600 phone might seem like a piece of cake to pay off after a couple paychecks, but life has a habit of interfering with even your best laid plans. It’s wise to treat your credit card like a debit card, and only spend what you have available. Make sure to pay off your balance each month, too, to avoid getting hit with high fees.
…And Then Ignoring the Problem
Many people carry a significant amount of debt already from the loans they took to pay for college. There’s no reason to add insult to injury by stacking credit card debt on top of it. Too many students and recent grads neglect their credit card statements in favor of paying down much higher bills from student loan departments. That’s a mistake. Student loan debt typically has substantially lower interest rates. Prioritize your payment schedule and consider putting credit cards first. The faster you pay off high-interest cards, the less you’ll pay overall in the long term.
Not Budgeting Well
You may not have much to budget for during college, especially if you live on campus or have your utilities covered by the school’s housing department. One survey in 2014 found that only about 65 percent of college students were likely to follow a budget to limit their spending. The same survey revealed that less than 80 percent of college students paid their credit card bills on time. In the credit card game, paying on time – and paying at all – are critical to maintaining a good credit score. In fact, 35 percent of your credit score is based on how well you pay on time. Missing an occasional payment may not seem like a big deal, but you can suffer significant consequences, including higher interest rates, a lower credit score, higher monthly payments and a frozen account.
Lending a Hand (the Wrong Way)
Don’t cosign a loan. This is one piece of advice that holds true no matter the situation. Whether it’s a friend, your partner or a family member, you need to think long and hard about the cons that come from cosigning a loan. As a cosigner, your credit is now linked with the other party’s, and if your friend needed help getting a loan, chances are she’s not in a good financial place. Along the same lines, avoid granting access to your card to other people as “authorized users.” Again, you’re letting someone else meddle with your borrowing habits, and that’s a good way to end up fixing credit later in life.
Charging Your Tuition
Your college might allow you to charge your tuition with a credit card, but stop and analyze the pros and cons before whipping out the plastic. Credit card issuers always charge higher rates than student loan lenders. Even with a low- or zero-interest introductory offer on a credit card, you’ll fare better applying for student loans than charging your tuition. Plus, schools typically include high processing charges for credit card use, adding to an already outrageous tuition bill.
Avoiding Credit Altogether
With all of the mistakes that can come from using credit cards poorly, you may be tempted to just ignore those offers in your mailbox. Don’t do it. Building good credit is just as vital as avoiding bad credit. You’ll have trouble buying a house or car, finding a place to rent or even getting a job without a decent credit score, and one of the easiest ways to build good credit is to get a credit card and use it responsibly.
In 2015, about 68 percent of college graduates walked the stage with over $30,000 in debt along with their new diplomas, representing a 4 percent increase in debt over the year before. You don’t have to be one of them. Borrow responsibly, pay your bills on time and avoid making purchases that you won’t be able to pay off quickly. Making money-smart choices now will prevent you from dealing with bad credit problems once you leave campus for good.
|Beth Kotz is a contributing writer to Credit.com. She specializes in covering financial advice for female entrepreneurs, college students and recent graduates. She earned a BA in Communications and Media from DePaul University in Chicago, Illinois, where she continues to live and work.|