6 Credit Commandments for Students
By Eva Norlyk Smith, Ph.D.
October 20, 2011
If you’re still in college, keeping a credit card in your wallet can offer important advantages.
It’s not only a fast and convenient way to pay. It will also help you build your credit history and develop a great credit score for the long-term.
Even better, it’s not that hard to develop great credit; it just takes time and discipline. If you start using credit early, pay all your bills on time and don’t max out your credit cards, you will build a solid credit foundation within just a few short years.
That said, there are all sorts of credit bloopers people make on the path to building perfect credit. Here are six tips to avoid the most common missteps:
1. Spend for today, not tomorrow.
One of the most common mistakes college students make, says Kim McGrigg, Community and Media Relations Manager at Money Management International, is to spend tomorrow’s money today.
“Many students assume that they will get a job at a certain income level as soon as they leave school,” says McGrigg. “As a result, they spend according to what they hope the future looks like. Unfortunately, many don’t get that dream job when they graduate.”
Having to deal with both student loans and credit card debt after graduating from college makes for a very difficult start in life. To avoid this mistake, McGrigg advises, it’s key to spend according to what is happening right now, not what might happen in the future.
2. Use your card, but use it well.
Credit cards offer a great tool to build credit, because they give you a chance to demonstrate that you can manage credit well. However, therein also lies the challenge. It may seem like paying that bill late or missing a payment one month isn’t that big a deal — particularly if it’s just a small amount.
But it is a big deal. Seemingly small lapses, like paying a bill late or carrying a high balance, will have a big effect on your credit score and not in the direction you want.
3. Expand slowly.
Showing that you can manage several credit cards and different types of credit also helps improve credit scores over time.
But take it one step at a time. Don’t rush into opening several credit cards and don’t apply for new credit too often. Demonstrate to yourself that you can manage one credit account well before you move on to the next.
4. Never forget: Relationships matter most.
Thanks to new rules for student credit cards, it’s now much harder to qualify for a student credit card if you’re under the age of 21. Underage students have to prove they have enough independent income to pay their bills or they have to have someone co-sign their credit card account.
Unfortunately, according to McGrigg, having someone co-sign your credit card can easily backfire.
“Many people don’t recognize the potential impact that mixing relationships with money can have,” says McGrigg. “Everyone has good intentions, but unfortunately, it doesn’t always work out. At best, it complicates the relationship, at worst, it damages the relationship.”
A co-signer is 100 percent responsible for the debt on the credit account he or she co-signs on, so think long and hard about it before entering into that kind of relationship.
5. Get help early.
When people do make mistakes and run into credit problems, instead of tackling them, most follow the example of the ostrich: They stick their head in the sand.
“When they start to realize they can’t pay the credit card, many students ignore it, and don’t get help,” says Sandy Shore, a spokeswoman with Novadebt, a nonprofit debt management service. “That can be really devastating to their future prospects. When they graduate and want to get a job, many employers look at the credit report. If that’s really messed up, it will be harder to find work. And there’s nothing they can do about it.”
6. Continue to learn.
There’s a lot to learn about credit management and financial skills in general, but investing a little time in learning about it will serve you well throughout your life.
“Think more long-term than short-term,” says McGrigg. “I always encourage students to learn more about money, even if their major has nothing to do with money. Credit and money management is something that they are going to have to deal with for the rest of their lives.”
The bottom line: Building your credit score now will pay dividends in the future. That’s because having a high credit score gives countless advantages in life. Credit scores determine how easy it is to get a loan, what terms you will be offered and how much you have to pay in interest.
If you develop bad credit, in contrast, the doors could be slammed shut on features of modern life that are often taken for granted. For example, you may have trouble getting a car because few lenders will approve you for an auto loan. Similarly, you may struggle to find a nice place to live because prospective landlords often hesitate to take tenants with bad credit. You can also wave goodbye to the dream of buying a house, since lenders will not approve you for a mortgage loan if you have bad credit.
In short, your credit rating has a tremendous impact on your financial life — both now and in the future. Build it wisely.
(Updated 10-20-2011. Originally published 05-22-2009.)