Heading off to college and considering a student credit card?
There are many reasons to be cautious — particularly when you’re on a limited income. However, once you graduate, it will be much harder to get accepted for your first credit card, say experts, so it’s a good idea to start with one now if you can.
“When beginning post-college life, it will be a great help to already have established a responsible credit track record,” said Gail Cunningham, Vice President of Public Relations at the National Foundation for Credit Counseling in an email. “For someone with no credit history [after college], even seemingly small steps, such as obtaining a credit card can be difficult, not to speak of buying a car or a house. [Without a credit history,] you may have trouble turning your dreams into reality.”
However, credit cards can quickly lead to financial disaster if you’re not careful, so it pays to be cautious. Here are eight do’s and don’ts to make sure you derive the full benefits from student credit cards and steer clear of the pitfalls:
- Get a student credit card. Anyone over 21 can easily compare and apply for a student credit card online or take advantage of mailed credit card offers. If you’re under 21, you must be able to show that you have enough income to pay the credit card bills or get someone to agree to be a co-signer on the card.
- Use the card to build your credit score. Your credit history tracks how well you manage credit. This history is recorded in your credit report, which forms the basis of your credit score. Establishing an excellent credit score will open doors for you in the future. It doesn’t just enable you to get approved for car loans or mortgages down the road. It will also make you look better to prospective employers. To build an excellent credit score follow the basics of good credit management: Pay all bills on time. Don’t carry balances above 30 percent of your credit limit and slowly build a solid long-term credit history showing you can manage a variety of credit.
- Start small. Most student credit cards come with a fairly low credit limit — sometimes as little as $300 to $500. It can be tempting to take out several credit cards to get access to a higher line of credit. However, juggling too many credit cards can get complicated fast and increase the likelihood of late or missed payments. That will hurt, not help, your credit score. “Ultimately, anyone seeking to build a high credit score will need at least three open and active lines of credit to have enough data to create a score,” says Cunningham. “But when you’re first starting out, it’s important to prove to yourself first that you can manage credit well before moving on to the next card.” Get into the habit of managing one credit card and learn the ins and outs of credit card use before adding another credit card.
- Ask for credit limit increases. Once you have paid your credit card on time for six to twelve months and otherwise used it responsibly, you may be eligible for a credit limit increase. Having a high credit limit makes it easier to build a good credit score. It will help boost a part of your credit score known as your credit utilization ratio, which is a measure of how much of your credit limit is available to you to use. How do you get a credit limit increase? After a year or so, simply call your card issuer to ask for one. In most cases, the customer service agent can give you a reply based on how well you have managed your credit card account. If they ask for permission to pull your credit report, decline it, as this will hurt your credit score. Instead wait, and call back six months later.
- Go for the first credit card offer you receive. You wouldn’t buy the first car you come across or marry the first guy (or girl) you go out on a date with. Credit cards are no different; it’s important to explore your options before applying. Building credit is a long-term process, so make sure the credit cards you take out give you the best terms possible. Compare mailed offers to student credit card offers online to see which offer the best deal. Then decide which to apply for.
- Mistake credit for cash. One of the most common mistakes people make when they get their first credit card is to treat their new line of credit like money in the bank. Part of building credit is to make sure your spending is in line with your income. Just because your friends can afford spending money on bars, spring vacations and frequent mall trips doesn’t mean you can afford it. Never use your credit card to pay for extravagances you wouldn’t otherwise be able to afford.
- Pay just the minimum. With credit cards, it’s a lot easier to lose track of your spending and slowly build up credit card debt over time. And don’t just think you will easily be able to pay it back once you graduate. “The biggest mistake many students make is that they get credit with the assumption that they are going to pay it back, when they graduate and get a good job,” says Sandy Shore, spokes person for Novadebt, a credit counseling organization in New Jersey. “So they are deficit financing and get out of college with credit card debt of $3,000 to $10,000, in addition to high student loans. But it’s not that easy to get a job these days, and many end up with high debt and no job.”
- Charge more than you can pay off in full every month. If you can’t pay it off, don’t charge it.
Finally, don’t neglect to learn more. When it comes to building credit, the more you know, the more you stand to gain. Continue to learn about credit cards and the basics of good credit management. Just like college, learning how to use credit is an important part of creating a foundation for a stable financial future. Five years from now, you’ll be glad you did.