Many young adults first start managing their money—and dealing with credit—when they head off to college. Establishing good credit habits early can set the stage for a healthier financial life later on.
Here are five things every college student should know about using credit wisely:
1. It matters now and later. It can be tough for an 18-year-old to see much farther down the road than next semester. However, maintaining a good credit file is similar to having a stellar social media profile. Most young adults know they need to watch what they post on sites like Facebook and Twitter because future employers could see it and may be inclined to make judgments about their credibility. The same thing goes for a credit report.
Just as an employer might look at your social media profile, a potential lender will review your credit report, which reflects your past credit behavior. A solid credit history can help you get the most competitive interest rates on student loans, car loans, insurance, apartment rentals, and, someday, a mortgage. On the other hand, blemishes on your credit report, such as missed payments, can be a red flag to lenders.
2. Credit “training wheels” may be required. You probably won’t qualify for your own credit card immediately, and that could be a good thing. The Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit CARD Act) requires anyone under age 21 to either have a cosigner (a parent or spouse) or be earning enough money annually to pay off his or her entire credit line.
An alternative to your own card is to be added as an authorized user on someone else’s credit account. For college students, this is often a parent. You’ll build a credit history this way, but your parents will still be able to see what you’re charging—and take you off the account if you’re financially irresponsible. This is a great way to create good credit habits, such as not charging more than you can pay off each month.
3. Credit carries rules, as well as privileges. Credit card due dates are firm. If you pay your bill even a day late, you could end up with expensive late fees and interest charges. Even a single 30-day late payment can end up on your credit report, and it could stay there for up to seven years.
Monitor your credit card account regularly, and consider setting up automatic payments from your bank account. Be sure that you understand your credit limit and that there are financial penalties for charging more than that limit. Find out whether your credit card issuer can send email or text alerts before your payment is due or when you approach your credit limit.
4. Minimum payments aren’t a bargain. Many card issuers are doing a better job of explaining minimum payments on their statements. Even so, that tiny number may still be the one that catches your eye.
Be sure to read all the text after the minimum payment, too—the fine print that says that if you pay just the minimum, you could still be paying on the card by the time your own kids are in college and you will owe thousands of dollars in interest charges. Letting a card get out of control by just making minimum payments—and then perhaps getting behind on paying it altogether—is a common way that people end up with a negative mark on their credit report.
5. Be a good credit monitor. Check your credit report regularly at AnnualCreditReport.com. Reports are available free through this site once every 12 months from each of the three major credit reporting agencies (CRAs). Checking your credit report is a great way to see how your credit behavior is recorded, and it is also a good way to make sure there is no erroneous information on your credit report.
As a college student, it’s good to get in the habit of checking your credit before you apply for any new loans, apply for a full-time job, or rent a new apartment. That way, you’ll know whether you might qualify for competitive interest rates or whether you need to spend some time practicing good credit behavior before making another big financial move.
If you’re a parent and need help talking to your college student about money and credit, check out CollegeParents.org. The site has some great tips for parents, and even offers a college budgeting worksheet that parents and students can work through together.
The information contained in this blog post is designed to generally educate and inform visitors to the Equifax Finance Blog. The blog posts do not give, and should not be assumed to provide, personalized tax, investment, real estate, legal, retirement, credit, personal financial, or other professional advice. Before making any financial decision, you should always consult with the appropriate professionals who can explain your options, rights, and legal responsibilities, and advise you on any tax, legal, credit, or business implications that may result from those decisions. The views and opinions expressed by the authors of blog posts are their own views and may not be the views or opinions of Equifax, Inc. and/or its affiliates.