- Posted June 09, 2017
College is one of the places where most people get acquainted with credit cards. When you first arrive, you may find yourself bombarded with credit card promotions, with tables setup on campus, and even with credit card companies calling you on the otherwise-never-used landline phone in your dorm room. Many will offer all kinds of freebies to get you to sign up - T-shirts, lava lamps, or a gift card.
When budgets are tight, its easy to think of credit cards as the solution to all your money problems. You wouldn't be the first college student to think so - a 2013 study by Fidelity Investments reported that the average college student graduated with about $3,000 in credit card debt. It may seem like an easy solution, but keep in mind that the decisions you make now with your credit card usage could have far-reaching implications that can affect you for years to come. Given the importance of this decision, and how easy and in-your-face credit cards will be when you go away to school, here are a few good things to keep in mind before you sign up for one:
Building credit is essential to being able to do “grown up” things a bit further down the line. Responsible use of a credit card is a great way to start building that credit. However, bad habits, such as not paying your credit card bills on time is an easy way to dig yourself into a bad credit hole. Starting off your adult life with bad credit is very difficult work your way back from, as your credit score will determine things like how much mortgage you can qualify for and at what interest rate, whether you can qualify for a private student loan to cover your tuition and room and board. Future employers will likely run a credit check on you as well, as will future landlords trying to determine if you will be a good tenant. So take your credit seriously! Understand that good credit will be your reward for paying your credit card bills on-time, while bad credit and guaranteed future headaches will be your penalty for spending above your means.
Despite appearances, having a credit card isn't “free money”, you still need to pay for your purchases, and some cards even charge you an annual fee just to be able to keep the card in your wallet. Also beware cards that have some kind of condition on their fees, such as the first year free, and then $100 annual fee every year after. Find a card that has no annual fee. They are out there.
When looking to signup for a credit card, don't go for the one with the best freebies. Take the time to shop around and compare cards. When comparing, pay special attention to the APR (Annual Percentage Rate). The APR is the interest rate you will be charged on any credit card balance which you do not pay off each month. Similar to Annual Fees, keep an eye out for conditions - a common one is no interest for the first year, but then some APR rate almost always kicks in.
Know Your Limits
This tip is two-fold. The first is to always know your spending limit on your card. If you are consistently carrying a balance close to your credit limit and are not paying it off in full each month, it could be negatively impacting your credit score. The second is to realize just how quickly debt can add up. Understand that your credit card is not “free money” and that you will need to pay each month. Here is an example: Say that you spend $200 on a new video game system or dress for a friend’s birthday party. If you charge the purchase to your credit card and pay only the $15 minimum each month with 18% APR, then that purchase will end up costing you roughly $224.80, and take your 15 months to pay off. And that is just one purchase….imagine how quickly the debt can accumulate. One way to give yourself discipline is to purposely choose a card with a lower spending limit. This will “limit” the potential damage and as long as you adhere to the limit, can lower your overall debt and teach you to live more within in your means.