Are you a college student stuck with a stack of bills, from tuition and housing to groceries and entertainment? Using a credit card to pay these expenses seems simple, but the results can be disastrous. In this guide you will learn the right and wrong ways to use credit and still leave college debt-free.
Can You Handle These Expenses Without a Credit Card?
Credit cards are short-term loans that banks allow you to repay over time. You can charge virtually anything on a credit card these days, from fuel at a gas station to a new stereo on Amazon. Here are some of the most common expenses for young college students: tuition and fees; textbooks; housing and utilities; groceries; transportation; entertainment; clothing and electronics; parties and travel; and dating
With a single swipe or the completion of a short online form, the obligation is paid and the bill is postponed for another month. You can even stretch out large purchases over several months by paying at least the minimum due each payment cycle. In other words, credit cards can bring immense benefits to all areas of life.
When taking a closer look at the list, however, you may decide that using a student credit card is not the best option. For example:
- Tuition and fees: The typical student credit card carries an Annual Percentage Rate, APR, of 18%. In contrast, an undergraduate Stafford Loan, available to anyone regardless of credit history, costs as little as 3.5%. By taking advantage of other programs, you can reserve your credit line for other purposes.
- Textbooks, groceries, clothing, and electronics: Some purchases provide a moment of satisfaction and lifetime of debt. If you cannot afford to pay off the balance and you are being charged interest, you will end up paying much more than the item is actually worth. This is exacerbated further by depreciation of value. More importantly, why would you want to continue paying for an item that you no longer have?
- Housing and utilities: Rent payments, electric bills, and cable bills should only be charged if you have the cash to pay off the balance. You can also use credit cards for housing during a crisis. If you are relying on credit to live in a fancy apartment, you are spending money that you do not have. Eventually your credit limit will run out, and you will be forced to move out or pick up another job for more income.
- Parties, travel, and dating: By spending money to impress people or receive instant gratification, you may be setting yourself up for a dangerous cycle. Everyone likes to live a life of luxury, but not everyone can afford to do so. Do not be one of the students who spend money they do not have, and then borrow money to repay those debts so they can continue living lives they cannot afford. Take responsibility for your finances and learn how to say “no” to extra expenses or make other arrangements for cheap, but equally fun, plans.
The Truth About Student Credit Cards
Unless you plan to pay cash, having a positive credit history is essential for large purchases later in life, such as cars and houses. Landlords and insurance companies are just a few of the organizations that do not issue loans but still use a credit score as a basis for opening and renewing a relationship. While a few people jump-start their credit with cosigners during high school, most people start using credit during the college years.
The credit cards aimed at young borrowers with little to no credit history are referred to as student credit cards. These accounts are easy to obtain. Representatives are frequently on campus, passing out free gifts and promoting online application forms. Mobile credit applications have made getting a new credit card even faster and more convenient.
Many banks target college students because they are big spenders and often brand loyal. Banks realize that the sooner they can get their cards into the hands of young people, the more likely they are to start racking up charges and the more likely they are to keep using that card, or at least that brand of card, for years to come. While these characteristics bring substantial revenue to the credit card issuers, they can be devastating to the student cardholder. Many college students hold high expectations for their futures, so they expect the few purchases they make now to be paid off as soon as they land that high-paying corporate job after graduation. But what happens if your dream career doesn’t work out? What happens if you can no longer service your debts?
In addition, student credit cards often come with an introductory interest rate. This teaser rate typically lasts for six months to one year, and then the interest charges on any balance or new purchases jump. The thought of low-interest or interest-free purchases entices many college students to spend money that they do not have. They can be useful though when used thoughtfully. Balance transfers allow you to transfer a balance that’s being charged interest to a different card where you’ll be charged no interest for the introductory period, which can last for a year or more. It doesn’t take a mathematics grad to work out the benefit.
5 Tips for Using a Credit Card Wisely
Some people recommend never opening credit accounts, but most financial professionals advise opening a few accounts and using them wisely. The following tips can help anyone dealing with a student credit card for the first time:
- Leave room for emergencies: A credit line is essentially a promise to borrow money today and pay it back later. No one likes the feeling of desperation when an emergency expense is due and there is no cash or credit to pay for it.
- Pay at least the minimum payment on time each month: Your payment history makes up about one third of your credit score. Make your payments late and you can ruin your chances for gaining more credit.
- Put positive marks on your credit report through the credit-cashout system: If you want an $80 sweater, transfer $80 in cash to a special savings account. Charge the sweater, and then pay off the balance immediately with your reserved savings when the bill comes. The physical act of handing over hard-earned cash can also help curb your spending.
- Limit your spend: Keep your credit limit at $500 to $1,000 until you have graduated and started a job. Base credit limit increases on what you can afford and not necessarily what the credit card company wants to give you.
- Get to know the terminology: Understand the difference between a fixed and variable rate, know what an introductory rate means and what happens when it ends, and be aware of the potential fees on the account. You should also understand your rights and obligations under federal law.
Here Are 8 Things You Should Never Do With a Credit Card
Students can improve their financial futures by avoiding these common credit card traps:
- Don’t charge more than you can afford to pay: Unless you are having a true life-altering emergency, use credit like you would use cash.
- Don’t pay annual fees for specialty cards or rewards cards: Especially for college students using credit responsibly, the fee is often greater than the payback.
- Don’t make an impulsive decision to sign up for a credit card: Take the time to compare interest rates and customer ratings at any of the comparison/review sites online. You can also talk with trusted family members and financial advisors.
- Don’t carry your credit card with you when you go shopping: Use cash for impulse buys instead of swiping a card and regretting the purchase later. Some people even freeze their student credit cards in a block of ice so they must wait for them to thaw before buying something.
- Avoid holding multiple cards: Don’t apply for multiple credit cards until you have learned how to use a single card wisely. Having access to more credit will not suddenly make you act more responsibly.
- Don’t rely on minimum payments to offset a non-emergency purchase: If you can’t afford to pay more than the minimum, you can’t afford the item.
- Don’t use credit to as a way to upgrade your lifestyle: Living on borrowed money is the surest way to create problems for yourself.
- Never use one credit card to pay off another credit card bill: You will still owe the debt, no matter which card it appears on.
Having the right amount of credit can be a lifesaver during emergencies. It can also be a severe drain for anyone lacking self-control. By using student credit cards responsibly, you can augment your finances, raise your credit score, and learn valuable financial lessons even before your first real job.