It's said that college students and credit cards don't mix. A few years ago The Market Watch, a Wall Street Journal Publication, supported research from a direct study that indicated Congress didn't believe young people under the age of 21 were capable of being responsible enough to use a credit card.
This couldn't be farther from the truth because pretty much anyone who can control their spending and learn how to use credit cards properly can yield a credit card. Using a credit card is one of the fastest ways to build your credit score so you can enjoy the benefits of having a high score if you ever needed to take out a loan for a large purchase.
A fraction of your credit score is based on your history (meaning how long you've actively been using credit), so it's not a bad idea to get started earlier rather than later. If you are a college student who is considering getting a credit card or already has one, consider these tips to help you manage it.
Don't View Credit as 'Free Money'
The sole purpose of having a credit card should be to use it sparingly each month and pay the bill off in full and on time. It's important that you don't view your credit card as 'free money' that you can spend however you want and just pay off over time.
That will not only increase your total utilization, but it can hurt your score and cause you to pay more money than you originally spent thanks to interest. When you don't pay your bill on time at the end of each payment cycle, you may be charged interest on your remaining balance. Keep this is mind when spending on your credit card.
While it's important to pay at least the minimum payment so you aren't charged a late fee, it's best to pay off the entire balance in full so you don't have to worry about it. Set up automatic withdrawals from your checking account to ensure you make on-time payments each month. If you don't think you can afford large credit card payments each month, then commit to spending very little on your card each month.
Keep Your Utilization Low, Below 30 Percent
If you want your credit score to increase, it's important to only spend up to 30 percent of the total limit on your credit card each month. In fact, keep your spending well below 30 percent if you can. Utilizing less of your total credit limit lets lenders know you aren't depending on your credit card(s) heavily each month and you can control your spending and payments.
If you have a credit card with a $1,000 limit, that doesn't mean you need to spend $1,000 on it each month in order to build your credit. When you take 30 percent of that total, you'll see that you should only spend up to $300 per month or even $200 per month just to be safe, then pay that balance off in full each month.
If you want to spend much less than 30 percent and still build your credit, you can do that too. If you want to use you card for gas and only spend $60 per month or on snacks and only spend $20 per month, just make sure you pay your balance off in full and your credit score will still grow overtime.
If you find yourself spending close to 30 percent of your credit limit each month, see if you can ask your credit card company for a limit increase after you've made a few on-time payments.
Search for No-Intro APR or Rewards Cards
Another benefit of using credit cards is earning rewards. There are many student credit cards out there and some of them offer small rewards like points for making certain purchases or just cash back on all purchases you make. This could be helpful if you'd like to earn a little cash each year while you use credit cards.
When it comes to credit card rewards, it's important not to go overboard with spending just to reach them. Most rewards for college student credit cards are very small and not worth going into debt over, but it's just nice to have.
Another card feature you should be looking for when choosing an ideal credit card is one with a low or no intro APR. APR refers to the interest rate you will be charged if you carry a balance each month. Credit card interest rates are high, and that's why it's so easy to get into credit card debt.
If you're a student without much credit history, you may not be able to score the lowest APR rate, but you can easily find a card with no APR for the first six to 12 months. This means you won't be charged interest even if you carry a balance.
The only reason why this type of feature would be recommended for new credit card holders is not so you can spend more than you can pay off each month and carry a balance without paying interest, but it's simply a good backup to have while you're learning how to use your credit card and find out what works best for you.
In the beginning stages, you may have a month where you don't track your expenses and end up overspending on your card. With 0% APR, you can pay off your balance easy and quickly and train yourself to monitor your spending by the time your 0% intro APR is expired and your interest rate goes up.
Avoid Store Credit Cards
Store credit cards at popular retailers like Target and Kohl's have high interest rates and tempt cardholders to spend more. Retailers may try to offer you discounts on merchandise in order to persuade you to sign up for their store card. If you shop at a certain retailer a lot, it may seem like a good idea, however, it isn't.
It's important to know your limits and start with just one or two basic credit cards to build your credit. If your first card is a department store card, that means you can only build your credit by buying more stuff from the store that you may or may not need. As a student, your income may not be that high so spending money at a department store each month can be a recipe for debt and disaster with credit cards.
Be Consistent and Dedicated to the Purpose of Credit
Credit cannot be built over night, but college students have the advantage of getting started on establishing a good credit score early. You just need to be dedicated to the true purpose of credit and commit to paying your bill on time and never carrying a balance. As long as you understand these basic concepts and can control your spending each month, you'll find success with using credit cards.