A student’s guide to credit and finances
By Dawn Papandrea
August 19, 2016
For years, mom and dad took care of all the household finances, spotted you a $20 (or two) whenever you asked, and even bailed you out when you blew through your savings account before you paid for your textbooks. But as you progress through the college years, it’s important to improve your money management GPA so that you start off on strong financial footing once you graduate, and begin building a strong credit profile.
Consider this guide your cheat sheet for college living on a budget, how to carefully introduce credit into your lifestyle, and what you need to do to prepare for the post-graduation aftermath of student loans and real-world bills.
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Ready, class? Follow this college cash and credit curriculum:
You might not have had to worry about things such as expense tracking and saving money before, but the college years are the perfect time to school yourself on living within your means and avoiding debt problems. Here are some assignments to get you going:
1. Start tracking your expenses. Maintaining a checking account and keeping track of every dollar you spend is the first step toward creating a budget. You might not realize where all of your money is going until you see it on paper (or plug your spending into an app such as Mint.com).
2. Generate some income. Whether you take on an on-campus job, sell your study notes online, or become a dog walker, an Uber driver or a nanny, there are lots of ways to find work as a college student. As long as you don’t blow off your studies for a midnight shift, earning some money with a part-time job or side hustle will help you with cash flow so you can begin to manage your expenses a bit easier.
3. Speaking of academics, keep those grades up. The quickest way to cripple your finances is to spend an extra year or two at college. Graduating in four years or less, however, will save you thousands of dollars.
Card smart: Plastic prerequisites
Not every college student is ready to use credit cards responsibly, and coming out of school with student loans and high credit balances is not the best way to spend your 20s.
For starters, getting a credit card isn’t as simple as it once was. The CARD Act of 2009 prevents college students from getting into deep debt trouble by requiring anyone under 21 to have an income before they can get their own plastic. And that’s a good thing!
Still, opening a credit card is the best way to begin building a credit history, which will come in handy in a couple of years when you go apartment hunting, want to finance or lease a car, or even find a job. Before you take the plastic plunge, consider taking these five introductory credit courses first.
1. Practice with debit cards. Although debit card accounts do not affect your credit history, they are good training for keeping track of a financial account and monitoring it to make sure it’s accurate. As a young millennial, you’re likely already very familiar with debit cards as your preferred payment method.
2. Pay some bills. If you aren’t already paying a bill or two on your own, you should start (even if the funding is coming from your parents). The idea is to get in the mindset of remembering to pay bills on time.
3. As to be added as an authorized user. If they are willing, ask your parents to add you as an authorized user on one of their credit accounts. Doing so will allow you to use the card and begin building credit in your name, but mom or dad will still be the primary cardholder and 100 percent responsible for paying the bill. As long as your parents have good credit and you use the card responsibly, being an authorized user can help you get accustomed to using credit if you can’t qualify for a card on your own.
4. Apply for a secured card. With a secured card, you can’t get in too much trouble since this kind of plastic requires you to put down a deposit, which will serve as your credit line. The downside is coming up with that deposit, and not getting it back until you decide to close or transition the account to an unsecured card. However, this is one way to qualify for – and build – credit on your own if you are a new plastic user with very little income. When shopping around for this type of card, make sure that the card issuer reports to all three credit bureaus so that your (hopefully) good credit behavior gets recorded.
5. Check out student credit cards. If you do earn income, many card issuers have special student credit cards that are specifically geared toward younger plastic users. Usually, the features of such cards include a low APR, credit management tools (such as free FICO scores – Discover now offers free FICO scores to everyone), error forgiveness and even some rewards.
The idea is to slowly get used to using credit as a student, so you don’t get in over your head.
Credit basics: A (credit) history lesson
If you’re wondering what the big deal is about credit scores and building a credit history, here’s a quick tutorial. Most people don’t worry about such matters until they apply for a line of credit and are denied. But you’ll become a star student of credit history and stay one step ahead of the game if you remember these key lessons:
Pay your bills on time, and reap the credit score rewards. Just as your GPA will sink if you turn in your assignments late, the same goes for your credit score. Your payment history comprises 35 percent of your FICO score, making it the most important factor. Therefore, if you pay all of your bills on time, all the time, you’ve already passed the biggest test.
Try not to carry big balances. You might think that as long as you pay on time, you’re in the clear, but the credit scoring powers-that-be also care how much debt you carry. The fancy term for it is credit utilization – the percentage of available credit limit that you are using. So for example, if you have a $1,000 limit on a card, and you owe $750, you are utilizing 75 percent of your credit.
Ideally, you want to keep your utilization below 30 percent at all times. Even better, try to pay your balances off in full each month so you don’t pay interest. Utilization accounts for 30 percent of your FICO score, making it the second biggest factor.
Handle your other debts responsibly. In addition to credit card accounts, your credit score also involves installment accounts such as your student loans. Making those set payments each month will reflect positively on your score, whereas missing a payment or two will ding your rating. Likewise, although other bills such as rent, utilities and cellphones are not reported to the credit bureaus, not paying those bills might result in your account being sent to collections, which can become a negative mark on your credit report.
If you can do the three things mentioned above, you will make the credit score honor roll in no time.
Advanced course: Controlling college costs
The best way to combat crippling student loan payments is to try not to borrow more than you absolutely need. One expert rule of thumb says to keep total borrowing to an amount that’s below your expected annual starting salary. So if your intended career field typically pays $45,000 to entry-level employees, try to keep your total loan amount below that.
Another strategy that can help you is making interest payments on your student loans while you’re still in school. Even though you’re technically not required to do so, paying a bit early can give you a head start, and this can get you in the habit of sending that payment every month.
You can also look into student loan forgiveness programs – just be sure to get the facts. For example, student loan forgiveness programs do not make debt disappear, and such programs are not available to everyone. There are intricate requirements for earning debt forgiveness, and each program is different.
Another way to keep college costs in check is to consider attending a community college that has formal agreements with four-year schools. Maybe it makes sense to spend a year or two at an institution that is much less expensive, then transfer those credits seamlessly to a university.
Lastly, be sure to research scholarships. Many private organizations and companies offer scholarships, so check around, ask your own and your parents’ employers, and do online research.
Your financial road map for the years ahead
As long as you don’t do anything super foolish with your money while in college, chances are you can’t get too deep in debt. In fact, if you’re going to take some financial missteps, college is probably the best time to learn from your mistakes, since the stakes won’t be as high as later on when you might own a home or have a family that relies on you.
That being said, your college years can still be a tough, overwhelming period for young adults burdened with student loans and other financial responsibilities, while taking on other forms of financial independence at the same time.
If you do find yourself struggling, it’s important that you don’t try to go it alone and make things worse. While you’re still in school, visit the financial aid office for some guidance. And take a personal finance course as one of your electives.
If that’s not enough, you might have to ask for some assistance from your parents. Just keep in mind that if you plan to borrow money from relatives or friends, you could get into a slippery situation. If you go that loan route, take it seriously.
Before agreeing to a loan, your relative or pal might have questions. He or she probably will want to know exactly what caused your current financial difficulty and why you need the money. Explain how you’ll use the financial assistance with a detailed, workable budget and share a plan to begin saving. Put the agreement in writing, including consequences for late payments and offering items that you can put up as collateral.
You also can look into student loan repayment options, some of which allow you to lower your monthly payments based on your income. Keep in mind that this will increase the life of the loan and you will pay more over time as interest accrues.
To get started on a smart financial path includes establishing a retirement fund (the earlier, the better!), building some savings and setting monetary goals. To draft your financial road map, you might want to speak with a financial adviser. It could end up being a worthwhile investment in your future.
Your college years will go by quickly, and just like that, you’ll enter the world of bill paying, credit score monitoring, and other “grown-up” money concerns. Don’t wait until you toss your graduation cap and try to pull an all-nighter to get a handle on your finances.
If you start embracing good financial habits and building a strong credit foundation while you’re still carrying a student ID card, your future self will be ready to take on the world.