College students are like chum in the water for the sharks than run credit card companies. Many students get suckered in when creditors begin flooding them with offers in the mail or even set up booths on campus pitching the virtues of credit cards, and though it's often a necessary evil to hold and use a card, many students aren't given the right information about how to use credit properly. If you're a student learning to navigate the waters of credit or a graduate looking to get your spending in shape, these guidelines will get you where you need to go.
- You Need Them Less Than You Think You Do: Legions of sob stories have been born by fresh college graduates getting in over their heads with credit card debt. But the plain truth is you need a credit card a whole lot less than creditors want you to believe you do. Sure, you'll need to open a line of credit to help boost your credit score, and life-threatening emergencies can call for one, but really, that's about it.People used to run out of money and, rather than charge purchases, say, "Well, I can't do any more things now." The moment you start to realize that life's better when you spend less than you earn, you'll be free.
- Interest Rates Are Murder: College students are among the most susceptible to the lure of easy credit thanks to the magical phrase "low introductory APR." The key is to remember two things: "low" is a relative term, and "introductory" means that you'll soon find your smaller rates swapped out for big ones. If a card offers zero percent APR for six months or a year, it's just the company's way of getting you hooked on easy spending before hitting you with rates that could be as high as 20 percent. Think about that: you'll be paying interest worth one-fifth of your balance, and that's not even the principal. Always, always, always know what the real APR will be.
- Always Make More Than the Minimum Payment: One of the provisions of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (or, cutely, the Credit CARD Act) is that creditors are required to disclose how long it will take you to eliminate your debt if you only make the minimum monthly payment. The minimum payment will keep you out of trouble but not do much of anything to knock out the principal amount you owe. If you owe several thousand dollars, it could take decades to get clear if you only pay the least amount possible. Statements now also display how much you will need to pay each month to eliminate the debt in three years. It's best to pay as much as possible on your debt every month until you're free.
- Your Credit Score Is Your Best Asset: Your credit score is a tool that will help you do everything from buy a house to get a car loan. To keep that tool sharp, you need to know what your score is and how to improve it. You can get a free credit report once every year from each of the three major credit reporting companies: Equifax, Experian, and TransUnion. Your report will show your payment and credit history, and for a minor fee, you can get your score. Avoid gimmicky sites like FreeCreditReport.com, which require enrollment in shady programs.
- Not All Cards Are the Same: Sure, they're all designed to do the same thing, but they don't all pay you back the same way: some offer cash incentives, some offer frequent flyer miles, and others offer different types of rewards or discounts. Before opening a line of credit, decide what kind of perk you'd like and how it can help you.
- Credit Cards Aren't Money (Seriously, They're Not): A lot of younger consumers take the approach that credit cards are acceptable means of making normal purchases. But they're not at all. Plastic isn't money, and credit isn't income. Think of "credit" the same way as the related "credibility": with the card, you're vouching for your ability to borrow money from the card company and pay it back, completely, in a timely manner. As mentioned above, credit is a tool that can be used wisely or foolishly, so don't go spending with money you can't repay.
- Ignoring Your Balance Means Drowning in Debt: It can be intimidating or even scary to confront the truth about your credit balance, especially if you've been spending poorly. But ignoring the problem won't make it go away. (Many have tried, though.) Even if you think you've been smart, you can't forever get away with turning a blind eye to your balance and hoping that sending in the minimum monthly payments will keep you in the clear. Credit card balances can snowball like nothing else, and if you don't keep an eye on them, you can wind up with debts that will take decades to eliminate. The best plan is to know your limit and use no more than 30% of it. That means that if your limit is $2,000, your balance shouldn't exceed $600. Do this, and your creditors will love you.
- Making Timely Payments Will Save You: No matter how big your balance might be, it's always a bad idea to miss a payment. Period. Skipping a payment or making a late one will actually do more to hurt your credit than merely carrying a large balance that's paid off in timely chunks. If you get a payment in a little late, you should be fine, but if you let a whole payment cycle pass, you could wind up getting as much as 80 points (!) lopped off your credit score. That's an insane deduction, and that means it's worth it to do everything in your power to pay on time. If you have a problem doing that, call your creditor. It's always better to talk with someone than get in trouble.
- Responsible Use Is Good: The best way to build credit is to use your card, but that doesn't mean going crazy. Instead, make small, responsible purchases that you can cover with cash when the bill comes due. A great way to do this is to use your credit card for something you'd already budgeted, like groceries or minor discretionary spending, then set aside the money so you can pay the balance in full at the end of the month. This will increase your credit score and prove to lenders that you're a solid and dependable consumer.
- If At All Possible, Avoid Them: I know this might sound counterintuitive given some of the previous advice, but really, unless you're making small and dedicated purchases with the intention of boosting your credit score, you should avoid credit cards except in the direst of emergencies. Think car accident, plane ticket for a funeral, medical issue, or something similarly unexpected and costly. You often need a credit card to rent a car or hotel room, but only to book the reservation; after that, you can settle up in cash. As mentioned above, credit isn't money, just a chance to borrow some. Don't do so unless it's a last resort.
