High School Seniors are getting ready to graduate, head off to college and out into the world onto their own. How exciting! You may even be getting your very first credit card. You will need to be mindful of creating and using credit properly to start building a good credit history.
The idea of getting your own credit card sounds great. The ability to use someone else’s money now and pay it back later is appealing. When used in a smart way, credit cards can help you build a good credit score and secure cheaper financing down the road. However, if used carelessly, credit cards can lead to financial issues that will stay with you for a long time.
Many students see credit cards as a way to spend money impulsively. It’s so easy to tap a card to order takeout, grab coffee or order that late night pizza. All of these splurges can add up quickly. And if you only pay the minimum payment on these monthly bills, your debt will continue to snowball.
Relying fully on a credit card for may not be a wise decision. However, it is important to start building a credit history when reasonably possible. In this article, we will explore some easy ways to develop good credit habits and how to start building credit history as well without getting yourself into trouble.
The first step is to understand how credit bureaus create your credit score. There are five major factors that you are “graded” on. (Yes, grades are important for your credit score too.) These factors determine your credit score.
- History of Credit – The length of time you have been using credit. The longer, the better.
- Credit History – How well have you been managing your payments. Are you always making on-time payments? Or are you sometimes (or always) late? Paying on time, every time, is very important for a good credit score.
- Credit Utilization Ratio – Your credit utilization ratio is the amount of credit you’ve used compared with the amount you have available. The less you are using, the better for your score. That is not to say you shouldn’t use your credit cards, but be mindful of charging them to the maximum limit.
- Types of Credit – It is a good idea to have a mixture of different types of charge cards: i.e. store credit cards and major credit cards such as Visa and Mastercard. This will help you get a good “grade” score showing that you can handle several debts at once.
- Applying for Tons of Credit Cards – As college students, you will be bombarded with applications for new credit cards. It is ok to take out a variety of credit cards over time, but don’t do it all at once and only apply for a card that is absolutely necessary. Each time you apply for a credit card, your credit will be pulled. And with each pull, your score will go down…sometimes dramatically. So, it’s safe to say you should only apply for the card you absolutely need to go off to college and the one you are sure you can pay off each month.
As you head off to college and consider how best to start on the right foot with your credit history, it would be wise to focus mainly on the first 2 factors listed above. While it is understandable that as a college student, you have a lot on your plate other than their credit history. But for your future self, it is important to make this a priority.
Did you know that your credit score will play a big part in the following to name just a few things:
- Purchasing a car;
- The cost of your car insurance;
- The ability to rent an apartment; and
- Buy a home down the road?
So why not start out with habits that will set you up for success now and in the future?
Easy Steps to Build Good Credit Habits
Pay the Balance in Full
The best way to use a credit card is to only charge the amount you are able to pay off in full each month. In order to do that, you should make the credit card a part of your monthly budget. If you are responsible for any recurring monthly bills, set up an automatic monthly bill pay through your bank so that you don’t have to think about making the payment…or missing the payment. Payments will be on time, every time. Even one late payment can have adverse effects on your credit score.
Tryout a Prepaid Debit Card First
Prepaid debit cards don’t help you build credit but may be a good way to practice budgeting before getting a credit card. Prepaid debit cards allow you to use only the amount you placed on the card avoiding interest you would pay if you carry a balance on a traditional credit card. With a prepaid debit card, you “load” money onto the card. You can only spend the amount you placed on the card. This would be a good trial run for an actual credit card.
If a prepaid debit card is an option you may be considering, be sure to read the fine print. Some cards may have fees attached to them. Double check the fee schedule first.
Use a Secured Credit Card
A secured credit card is a type of credit card that requires a security deposit to open the account. The cardholder typically makes a one-time refundable security deposit that acts as collateral for the credit card issue. When used responsibly, a secured credit card can be a great tool to help you build good credit. But before applying for one, it may help to understand how secured cards work.
- To open a secured credit card, a cardholder typically makes a one-time refundable security deposit. Secured card credit limits vary. Depending on the issuer, the limit may be the same as the deposit or, in some instances, more.
- A secured credit card may be a good option for people looking to establish, build or rebuild their credit.
- When it comes to paying for something, secured credit cards work the same as other credit cards.
A secured credit card is a good way to build credit if you have no credit history. It may be easier to get approved for a secured credit card than a traditional credit card. The money you deposit into the bank is your guarantee to the bank that you will pay the card off.
With this information in hand, the college student will have a clear reason why they do need to care about their credit score. The effects of poor financial management may linger long past their college graduation.
