How Not to Move Back in With Your Parents
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College Credit (the Financial Kind)
Credit cards can be a very beneficial tool in life; they can also be your worst enemy. Some people choose to avoid them all together in life to spare themselves the temptation to overspend; others get as many credit cards as possible and spend like there’s no tomorrow. So…as a college student, what’s the best option for you? And if you do get a credit card, how do you know what’s best to get?
If you think you are a responsible person and have a plan to make sure that you use a credit card only for things you need and will pay the credit card off on time, every month, then there’s no reason for you to not get a credit card. Having a credit card, and using it responsibly, is a great way for you to build good credit, which will benefit you for years to come. Conversely, if you don’t trust yourself with a credit card and think you’re likely to spend because of the increased buying power a card gives you, then don’t get a credit card until you feel like you can use it in a conscientious manner. Otherwise, you’ll continue to build credit, but it will be of the bad variety.
So let’s say you have deemed yourself a responsible individual and that you’re ready to take on the financial world one Visa/Mastercard/American Express/Discover card at a time. Remember: just choose one card! As a college student, you have no real need for more than one card.
Next, when beginning weighing your options, keep in mind that you don’t need a store credit card. While it might be great to save 10% on your new outfit, you’re committing yourself to a card that has a higher interest rate than a “regular” credit card and one that has a lower credit limit…and while that lower credit limit may be helpful in terms of preventing you from overspending, it increases your chances of hurting your credit score. Why? Because a good chunk of your credit score (30%) is based on the amount of money you owe in relation to how much you credit you have available. So even though you pay off your $900 balance on your $1000 credit card every month, you’re hurting your credit score because you are utilizing 90% of your available credit. This is also the reason why you shouldn’t close your credit card accounts. If you had two cards with a $1000 limit on each and you had a total of $500 on them, you would have utilized 25% of your credit, which is fine. However, close one of those credit cards and suddenly that 25% utilization rate becomes 50%, which will hurt your credit score. So how much should you utilize? While there are varying opinions about the number, keeping your utilization below 30% is a good place to be.
So now it’s time to make the decision. What should you really be looking for in that credit card? You should be looking for one that offers you the lowest possible APR. Even though you’re planning on paying off that credit card every month and not accumulating interest, it’s always possible that an emergency will arise that could alter your plans, so you may as well prepare for such a scenario. Avoid any card with an APR over 20%, as a general rule of thumb.
If you’ve found a few with low APRs, what should you do next? You should eliminate any credit cards from contention that have annual fees, even if the first year is free. While the rewards that come with credit card might be enticing, given the amount of (little) spending you will do in a year’s time, you won’t make up the yearly fee in the amount of rewards that you earn.
At the same time, though, you should find a card that gives you some rewards. There are some credit cards that give you cash back, some that give you airline miles, and even some that will eliminate bits of your student debt. This is a decision that you need to make based on your own personal preferences. Still, make sure that you are keeping the rewards bit as a secondary focus when selecting the card, with the APR and yearly fees being the primary.
At this point you should have a good idea as to which card you’re going to get. Assuming that all goes according to plan when you apply, remember that at this point, as long as you are a good steward with the credit card, you’re in control. This means that you can try calling up your credit card company and asking them for a higher limit (increases credit score) or reduction in APR.
To get started on your credit card choosing, go to cardhub.com and see what credit cards fit your needs and listen to the podcast to get more helpful info.