If you’re new to the concept of credit, you may be wondering why you should even bother getting a credit card at all, especially if you’re a student with little extra to spend at the end of each month. First off, let’s go over the possible implications of having little to no credit history and the potential benefits of building credit at a younger age.
For decades, consumer credit has been an essential part of the U.S. economy, allowing your average middle-income family to finance their slice of the American Dream. If you are gainfully employed and have sufficient savings to support yourself and your loved ones, and can maintain a minimum standard of living, you may not need to concern yourself with the drudgery of building or repairing your credit. Now, if you’re likely to buy a house in the near future and strongly suspect you may not have enough saved up for one by the time you get around to it—or even to cover basic items and emergency expenses—then you may want to think about developing a credit history. Your credit history is the inventory of all your debts and the late or timely payments you have made to your lenders and creditors. Banks and lending institutions summarize that information in a three-digit number that serves as your presentation card when you apply for any loan, credit card, apartment lease, and perhaps even that job you’ve been keeping your nose to the grindstone for.
So, how do you build credit? Developing credit history can often seem like the work experience conundrum: you need work experience to get a job, but you’re unlikely to get a decent job if you don’t have any work experience. Although there’s some truth to that statement, there are still ways for you to start building credit while you’re still in school. One great way to start on the road to creditworthiness is to apply for a student credit card; another one is to apply for a student loan. Before you do anything, however, be aware that consumer debt, especially revolving or credit card debt, is a major problem in the United States and, as such, you shouldn't forget the importance of building credit the right way. That being said, let’s go over the dos and don’ts of your student credit card.
1. Building a Credit History
Do use your student credit card to build credit slowly but surely. One excellent way to do that is to set up automatic deductions from your card to cover small amounts like monthly subscriptions and bills, things you know you’d be able to cover with cash and will likely remember to repay at the end of the month.
Don’t save your card for emergencies only or overspend without realistically assessing your financial situation. Those who shy away from using their cards aren’t taking full advantage of its potential benefits, and those who abuse it are likely fooling themselves into believing they’ll be able to make a minimum payment at the end of the month and not pay extra for it in the long run.
2. Frequency of Use
Do use credit instead of cash at least once a day, but only to purchase things like coffee and food. If you're not good at remembering appointments or other responsibilities, set up an event reminder on your phone, computer, or Google calendar and pay off your small purchases at the end of each day. By doing so, you'll build credit steadily over time, with no risk of going over your credit card limit.
Don't be tempted to make major purchases with your card unless you're certain you'll be able to repay the full amount at the end of the month. Difficulties may arise, and the card may tantalize you with the promise of not having to pay until tomorrow, but if you don't have the means to pay back what you owe, putting a large expense on credit could ultimately be more detrimental than going without something you can't really afford.
3. Monthly Repayments
Do try to make full credit card payments at the end of the month. By paying the minimum you're not only racking up debt, but you're also accruing interests, which tend to be higher for student credit cards than traditional cards. Besides protecting your credit, high interest rates are yet another reason to keep credit card spending at a minimum.
Don’t forget to pay your dues. Even if you can only cover the monthly minimum, making timely payments is the best way to keep your credit score from dropping. Again, even if you're rather forgetful, there are things you can do to avoid missing your due dates. If event notifications don't cut it for you, consider setting up an account with Mint.com or downloading their app. They'll remind you of your monthly obligations and notify you of any changes to your bank account.
4. Credit Card Limits
Do read your card's terms and conditions before using it to cover large expenses. All transactions you make with your credit card are added to your card balance, which you'll be expected to repay in part or in full every month for as long as your account is active. Before signing up for a credit card, inquire about its APR, find out if your company offers a grace period for late payments, and if there are penalties for missing a payment. Some providers will forgive the first missed due date and allow customers additional time to get caught up with payments, yet not all credit card companies are as lenient.
Don’t go over your credit card limit, unless you want to pay additional fees and penalties. Since the Credit CARD Act of 2009, credit card companies must have your express permission to process transactions over your card limit, and some have even done away with overdraft fees altogether. However, read your credit card agreement thoroughly before signing and know what you're getting yourself into. Some credit card companies apply other penalties, like taking away any points or rewards earned through purchases.
Do use your cards to earn points and take advantage of cash back and rewards. Most credit card companies offer excellent benefits for those who use their cards regularly and keep up with their payments. Common rewards include getting cash back on certain purchases, earning points you can later redeem for items in the credit card company's online shopping mall, or accumulating frequent flyer miles for future travels.
Don't miss out on all the great benefits that being a responsible credit card holder can provide you with. Shop around for cards and look for one with a reasonable APR, low or no fees and penalties, and perks you'll be likely to use, including frequent flier miles and cash back rewards.