Finance Blog
Four Things College Kids Need To Know About Credit
Four Things College Kids Need To Know About Credit
By Robin Holland
Leaving home and moving into the dorms can be the first step into adulthood for a lot of college freshmen.
Along with juggling a full class load, maintaining a busy social life, and remembering to do laundry every once in a while, new college students might find themselves responsible for managing their own finances for the first time in their lives.
New college students (really anyone) can quickly find themselves in trouble if they don’t understand how to manage their money and use credit cards wisely.
In the financial literacy workshops I teach, so many people just don’t understand the basics of how to use credit cards. Getting ready to go off to college is the perfect time to learn some lessons about developing credit card and financial savvy.
Lesson #1: Credit cards are a convenience, not a form of income.
I’ve met college students who think that because a credit card company gave them a $1,000 limit, they have $1,000 to spend every month.
Sorry, guys, that’s not how it works. Before using a credit card, you need to determine your monthly income. That’s all you’re allowed to spend. Credit cards are not a means of income to survive (or pay for nightly pizza fixes).
Adjust your spending to match your financial situation. Do you have a budget? Do you know how much you spend on books and food and clothes? Maybe you’ve been working fifteen hours a week the entire semester and your paycheck has been enough to pay off your credit card bill every month. But then exam time comes around, and you have to drop down to just five hours a week. You don’t have the same amount of income, so you may need to adjust your discretionary spending.
Lesson #2: Just because you can afford the minimum payment every month doesn’t mean you’re not in debt.
The new credit card laws might help with this problem, but it’s still a good lesson to learn. Under the new law, the creditor is required to tell you on your statement how long it will take to pay off your debt by making only the minimum payment.
For example, let’s say you go on a shopping spree at the campus bookstore at the beginning of the semester. You put $500 worth of books on your credit card, and you charge another $200 in school logo merchandise.
It will be great to wear that sweatshirt to class in the morning, and you know your mom and grandma will love their new mugs. It doesn’t seem like such a big deal until you get your statement and see that by making the $15 minimum payment every month, you’ll still be paying off that one semester’s worth of books when you graduate.
Lesson #3: You should shop around for the best terms for your financial situation.
As a college student just starting out, you might face a pretty high interest rate. When you’re looking for a credit card, start with your bank. It might have a special credit card for college students. You can also shop around on sites like Bankrate.com for the lowest interest rate.
When shopping for a credit card, keep in mind that lots of inquiries (or when a potential creditor verifies details of your credit history by pulling a copy of your report) within a short period of time can ding your credit score.
You’re just beginning to establish your credit—there’s no need to start out in the hole. Do your research first and find the top three cards that might be a good fit for your financial needs. Apply for those three, and then take the one that works the best.
Above all, do NOT get a credit card just because someone is offering you a pretty towel or concert tickets. How you start to manage your finances at the age of eighteen will affect you for years to come.
Lesson #4: You should limit the amount of plastic in your wallet.
As a college student, or really any young person, you should limit the number of credit cards you own. Almost all retailers take the three major credit cards—Visa, MasterCard, and Discover. You don’t need multiple store cards. You’re a student, not a supermodel or VIP who eats at four-star restaurants every night.
If you find that you’re having difficulty paying off your credit card bill every month, you should think of it as an emergency-only fallback. Most college students are going to graduate with student loans. Why would you want to graduate saddled with credit card debt as well?
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"You don't need that Express card or a Macy's store card."
That always seems to be the biggest problem for my friends. I've actually seen people sign up for credit cards because they get a free t-shirt or something. So scary!
People don't realize that sure you get 20% that ONE purchase for signing up with a store's credit card, but they usually have huge interest which can be damaging to your credit.
When you mention not having too much plastic – I'm looking to clean up my credit report a bit. I have some cards that have 0 balance, but, they do have long and positive credit history. I'm planning to get a new home in about 2-3 years (have current mortgage in good standing), and want my overall credit to be as good as possible. Am I better off closing out these cards that I'll never use for the history, or leave them open? I'm thinking when I go to apply, if they say it will help at the time I can always close them in a pinch but it's not possible to re-open and get my history back. Any advice on what to do with open accounts I'm not using?
@Nathan – thanks so much for reading and commenting. So often, people do neglect to think about how new accounts will affect their credit. Also, carrying around more credit cards than you need can contribute to identity theft. It's always a good idea to evaluate what you really need.
@Derek – That's a great question and we have a new post coming up in the next few weeks on how to evaluate your open accounts and decide what to close. Check back soon for more info!