Using Credit Wisely

How to use credit wisely while in college

Used correctly, credit cards can be a very beneficial tool in life. But if you abuse them, they can also be your worst enemy.

So, do you need one as a college student? That depends.

If you’re a responsible person and have a plan to make sure that you use a credit card only for things you need and will actually pay the credit card off on time, every month, then go for it. 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.

But if you don’t trust yourself with a credit card—and be honest with yourself—don’t get one. It’s easy to give in to the temptation to use credit cards to buy things you don’t need and run up a crazy high balance you can never hope to pay back.

If you do that, you’ll still 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 that.

Don’t get a store card

While it might be great to save 10 percent 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.

Sure, that lower credit limit can keep you from overspending, but it can also hurt your credit score.

Why? Because a good chunk of your credit score (30 percent) is based on the amount of money you owe in relation to how much credit you have available.

So even if you pay off your $900 balance on your $1,000 credit card every month, you’re hurting your credit score because you are utilizing 90 percent 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 percent of your credit, which is fine. However, close one of those credit cards and suddenly that 25 percent utilization rate becomes 50 percent, 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 percent is a good place to be.

Do choose a card with a low APR

Sure, you’re planning on paying off that credit card every month and not accumulating interest. But it’s always possible that an emergency will arise that could alter your plans, so you may as well be prepared.

Avoid any card with an APR over 20 percent, as a general rule of thumb.

Don’t choose a card with an annual fee

If a card you’re looking at has an annual fee, ditch it—even if the first year is free.

While the rewards that come with a 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.

Do choose a card that offers rewards

Some credit cards give you cash back. Some give you airline miles. And some even eliminate bits of your student debt. These are all good things.

What you choose is up to you. But make sure that these goodies aren’t your primary focus. The fees and APR should come first.

Get help with your choice

To get started on your credit card choosing, go to CardHub and see what credit cards fit your needs. You can also listen to our podcast on the same topic to get more helpful info.