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Let’s face it: As a college student, you’re probably more interested in enjoying late-night pizza and last-minute road trips with friends than thinking about your financial future.
But if you start making credit card mistakes in college, those mistakes can catch up to you later in life.
It may seem like a minor slip-up now, but the consequences of missing a card payment or racking up debt can be hard to shake. They might even creep back years later, when you’re ready to apply for a mortgage or auto loan.
If you want to get schooled before you make a money blunder, here’s how you can use credit to your advantage and avoid five common credit card mistakes in the process.
Before we get into how to avoid credit card mistakes, let’s talk about what a credit card is — and why it’s important to use one responsibly.
What you should know: Credit Cards 101
In simple terms, a credit card is a tool that lets you borrow money to make purchases, balance transfers and cash advances. When you use a credit card to borrow money, you do so with the understanding that you’ll pay back the amount borrowed at some point in the future.New to credit cards? Read our clear and simple definition
When you apply for a credit card, the bank or issuer checks your credit history and other criteria. If it approves your application, it will set a credit limit and interest rate.
Your credit limit is the maximum amount you can spend on the card. Your interest rate, usually expressed as an annual percentage rate, is the price you’ll pay for borrowing money.
That’s right — there’s a cost involved when you borrow money with a credit card. The good news? If you pay the entire balance shown on your statement by the payment due date each billing cycle, you can avoid paying any interest. (Note: This doesn’t apply for the cash advance balance.)What is the average APR on a credit card?
Students are often seen as higher-risk customers when applying for a credit card, for reasons like their short credit history or their low (or no) income. That means students can generally expect to get a higher APR than the current national average — about 21% versus around 16%, according to a 2014 study of college student credit cards by MagnifyMoney.com.
But remember: You don’t have to pay interest at all on your purchase and balance transfer balances if you avoid carrying a balance. This is where it’s important to work on building good credit habits. Speaking of which, let’s talk about those five credit card mistakes students will want to avoid.
5 credit card mistakes students should avoid
- Pretending credit doesn’t exist
- Missing payments
- Running up credit card debt
- Not setting a budget
- Not understanding how APR works
If the only credit card advice you ever got was “don’t use one,” you may want to get a second opinion. The truth is, credit cards can be a great tool for building credit — if you use them responsibly.
That’s a big deal, because you’ll likely need good credit when you start adulting. Lenders may look at your credit when determining whether they’ll rent you an apartment or approve you for a loan.
So, if a car and a home or apartment are in your post-graduation plans, it’s not a bad idea to start working on your credit scores now. Your credit scores are three-digit numbers, typically ranging from 300 to 850, that lenders use to evaluate the probability you’ll repay your debts. FICO and VantageScore are the most commonly used credit scoring models, though others exist as well.Get your free VantageScore 3.0 credit scores from TransUnion and Equifax
According to a 2016 Student Monitor report, students with a credit card in their own name reported having a mean credit score 50 points higher (679) than students without a credit card in their own name (629).
“Many young adults already have credit profiles and don’t realize it,” says Freddie Huynh, vice president of credit risk analytics at Freedom Financial Asset Management. And one of the best ways to strengthen your credit profile is to use a credit card responsibly.
When you’re juggling essays and midterms, it can be easy to miss a credit card payment. And missed or late payments have consequences.
Young adults are especially vulnerable to late fees, warns Ashley Feinstein Gerstley, a money coach who runs The Fiscal Femme website.
“It’s our first time budgeting,” she says. “And now we have this financial tool that we’re not educated on. Once we get burned by fees or we have more experience, then we tend to be more careful.”
So how can you avoid this all-too-common mistake? Feinstein Gerstley advises setting recurring alerts for all your bills, ideally a few days before your monthly payment is due. Many issuers will even let you link your credit card to a checking or savings account and set up automatic alerts and payments.
When the alert buzzes on your phone, go ahead and review your card statement. That way, you’ll know how much you’ve been spending and can look into any suspicious charges before the automatic payment goes through.
If you have a credit card balance, make a plan to pay it off. But using money earmarked for another necessary expense, like rent, won’t help. That will get you on what Feinstein Gerstley calls “a hamster wheel of paying down debt.”
“We want to pay debt as quickly as possible,” she says, “so putting more toward it than we can realistically afford means having to put our spending on the card again.”
Alyssa Jeffers, now a marketing coordinator at LRG Marketing Communications, knows this all too well. In college, she got in the habit of using her card and paying off her balance right away.
That’s usually a good money-management habit. But Jeffers was using a set amount her parents gave her, and when that source of money went dry, she kept buying things with the card. Eventually, she had $7,500 in credit card debt with no quick way to pay it off.
Eight years later, Jeffers is still making steps toward paying off debt and cautions against running up a balance. That advice applies to life after college, too.
“Just because you get a big-kid job right out of college and you’re getting paychecks now, it doesn’t mean you can spend, spend, spend,” she says.
If you’re not tracking your finances, you won’t know if you’re running up more debt than you can handle.
“Learn how to live below your means,” Huynh says. “Know exactly what you have to spend each month — and spend less. The long-term impact on credit profiles, credit scores, financial fitness and overall stress is immeasurable.”
To create your budget, start by listing your monthly income, including income from any jobs you have as well as anything your family provides for you. Then, list your monthly expenses like food, school supplies, gas and car insurance. To keep yourself motivated, write down a goal. Do you want to save up for a purchase, add to your emergency savings or simply stay out of debt?
Then, consistently track your finances. Here are a few ways to do that.
- Use a tool that makes you record your expenses, so you’ll be more conscious of your spending. Write them in a spiral notebook, an Excel spreadsheet or in your Notes app — whatever you prefer. Feinstein Gerstley says budgeting apps and also work well (note that HomeBudget charges).
- Deposit cash and checks into your bank account as you receive them.
- Open all bills as soon as they arrive (or when you get the alert) and pay them immediately.
- Use only one credit card while you learn how to build credit.
Following these guidelines can help you avoid putting charges on your card that you can’t pay off.
“Pick what works for you, and use it consistently,” Huynh says.
The terms and conditions that come with a credit card can be harder to understand than that second-semester professor who mumbled. APR is one detail that many college students simply don’t get, Feinstein Gerstley says.
Here’s a quick tutorial.
When you charge a purchase to your credit card and don’t pay off your balance in full by the date your payment is due, it accumulates interest. But if you pay off your balance each month, you won’t pay interest on that balance.
Generally, credit card companies offer a grace period for new purchases. This period is the gap between the end of your card’s billing cycle and the date your payment is due. With most credit cards, if you pay off your balance in full and have no outstanding cash advances, you won’t be charged interest on new purchases during the grace period.
Heads up: If you make only the minimum payment every month, you could be inviting debt. For example, for a $1,000 balance with an APR of 21%, it’ll take about five and a half years to pay off the balance, and you’ll pay about $662 in interest.
Make sure you know the following details of your card:
- Your balance
- The date your payment is due
- The purchase APR and penalty APR
- The date your introductory APR ends (if applicable)
College students can avoid making credit card mistakes — it just takes some diligence and know-how.
By setting payment alerts, charging only what you can pay off, tracking your spending and knowing your card’s details, you can start life after college with positive credit and no credit card debt.