Credit 101: The College Student’s Guide to Credit Cards
They say college is one of the best times of your life and honestly, I’d have to agree. You’re making that first transition into adulthood, meeting new people, pursuing your career goals, and most importantly, you’re finally independent.
That first taste of freedom you get when moving out of your parent’s house and into a dorm freshman year is one of the best feelings of young adulthood. But with that new freedom comes much responsibility including financial responsibility.
Managing your finances can be overwhelming at first. You may or may not have some personal finance knowledge before heading to school, but one thing is for sure: you will need it.
Why Good Credit is Important
Many college students apply for their first credit card when they get to college. This isn’t necessarily a bad thing, as establishing good credit early in the game is important.
Some Employers Use It To Weed Out Job Applicants
Yes, that’s right. When you graduate from college and apply for that dream job, you may be turned down if you have a bad credit history.
Although employers cannot see your three-digit credit score, they can see your credit report which includes current debts, anything you may have in collections, as well as how often you apply for lines of credit.
It Can Save You Money When Setting Up Utilities
Utilities such as gas and electric are necessities, so you will not be denied when setting up new service in your name. It is, however, essential to know that if you have poor credit or no credit at all, you may be required to pay a deposit which could range anywhere from $25 to over $300.
You Get Better Loan Rates
When applying for student loans, car loans, or just about any other loan, you may be turned away if your credit score isn’t up to par. If you are approved, higher interest rates may be a consequence of bad credit.
Renting An Apartment
If you have a poor credit history, a landlord may require you to have a cosigner or pay a higher security deposit.
The College Student Swindle
College students are a credit card company’s ideal consumers. As newly independent young adults, they tend to be loyal customers to their first credit card company over time. College students are also high spenders. More spending means paying more interest which means more money for the company.
Credit card companies used to target college students using promotional materials such as free t-shirts and bags in exchange for signing up for their credit card. Many of these students didn’t even have an income to pay their bills, yet were encouraged to apply anyway.
In 2009, the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act was passed and put into effect in February 2010. The law required more transparency in the practices of credit card companies. CARD also imposed new regulations for promotions and marketing tactics.
As part of the law, credit card companies were no longer able to offer free gifts or promotions within 1,000 feet of a college campus. Unfortunately, this hasn’t stopped the manipulative marketing.
Credit card companies have been known to camp out at popular off-campus locations and continue their promotion there. Illegal? Nope. A little shady? I’d say so.
Apply for the credit card, not the promotion. Don’t be tempted by the offers and freebies. If it sounds too good to be true, it probably is. Make sure that your decision to apply for a credit card is 100% your own. Do not get any influence from the credit card company!
These companies are out to make a profit. While getting a credit card can be a mutually beneficial transaction, stay one step ahead by being educated and well-informed.
Applying for a Credit Card
You’ve thought about it, and you’ve decided to get a credit card. Congratulations on your first step to establishing good credit and setting yourself up for financial success down the road.
The CARD Act requires all applicants under 21 to provide proof of an independent source of income that is sufficient to repay what is charged. If this can’t be provided, there must be a cosigner that is to be held financially responsible, usually a parent or guardian.
If you move forward with your decision to apply for a credit card, here is a checklist of things you should look for when comparing multiple card options:
Student Credit Cards
While it isn’t necessary, student cards can have great perks such as rewards for good grades and extra tools to help you manage your finances.
No Annual Fee
Some companies charge a fee once a year for using their services. This fee can range anywhere from $25 to $500 and is automatically tacked onto your bill in the same way a purchase would be. Look for a card with a $0 annual fee.
Low Annual Percentage Rate (APR)
Your card’s annual percentage rate is the percentage of interest you will pay on your balance over the year. Some cards will offer promotions such as “0% Introductory APR” which means you won’t pay any interest on your balance for the term of the introductory period.
To give you an idea of what you should be looking for when it comes to APR, it typically ranges anywhere from 12% to 25%. There are some instances where it may fall outside of this range in either direction depending on your credit history and the type of card. As a rule of thumb when it comes to APR, the lower, the better.
Choose a card that will make it easier than ever to manage it on the go with a mobile app. These apps usually have features such as push notification alerts, payment reminders, and quick access to all of your transactions and other relevant account information.
Rewards and incentives
This one is a bit tricky. Rewards should not be a primary focus for first-time credit card holders. These rewards can incentivize you to spend more which can quickly get you into trouble. There are, however, some great benefits for having a credit card with rewards.
Many cards offer cash back rewards for purchases made on entertainment, restaurants, and gas. This means that a certain percentage of what you spend in those areas will be given back to you usually as a credit towards your balance, gift cards, or a check.
If you already have an idea of the kinds of purchases you will be making with your card, then why not be rewarded for it? For example, if you plan on driving home to see your family every weekend, a card that offers cash back rewards for gas may allow you to quickly rack up the rewards by spending what you already planned to spend.
Managing Your New Card
Congratulations, your application was approved! From this point on, how you manage your new card can either set you up for incredible financial success or hardship — the choice is yours.
Here are some tips and habits that will help you stay in control of your finances and manage your credit card like a pro:
Make The Payments On Time, Every Time
The last thing you want to do is get in the habit of paying your bill late. Not only could you be hit with late payment fees, but if the payment is late for more than 30 days, the credit bureaus will be notified. Late payments can stay on your report for up to seven years.
Don’t Spend What You Can’t Afford To Pay Back In One Month
Typically, a standard minimum monthly payment is around $25-$35. A good practice is to pay more than the minimum, if not the entire balance from month to month as it increases your credit score and you won’t have to pay any interest.
Don’t Allow Your Friends To Use Your Card
Having a large sum of money at your disposal can be a great feeling, but don’t let it get to your head. Don’t be the friend who offers to pick up the tab and put it on your card to look like a big shot. The feeling isn’t going to be so great when you get that billing statement. Also, never let anyone make purchases on your card. Your name is on the account, not your friend’s. You will be the only one held accountable for the consequences of overspending.
Ask For Help If You Need It
If you do end up getting in over your head, don’t panic. Call the credit card company and explain what’s going on. Many times they are very reasonable and willing to work with you, you just have to ask. They may waive late payment fees, lower your payment, or reduce interest rates. Don’t be afraid to ask for help. We all make mistakes, but it is better to correct them earlier than later.
The decision to get a credit card is one that comes with a great deal of responsibility. Credit cards should not be taken lightly. As an independent young adult, you must educate yourself on every aspect of your finances. Learn as much as you can about your credit card and make wise decisions. You'll be well on your way to a prosperous financial future.
Michelle Dixon is a millennial mom, wife, blogger and law student. She is studying Business and Entrepreneurship for small businesses and creative entrepreneurs. She has a blog called Take Back 9 to 5. Her blog focuses on side hustles and income streams outside of the typical 9 to 5. Michelle also provides freelance writing and virtual assistant services for solopreneurs.