Are Credit Cards Good for College Students?
Credit cards for college students: Good idea? Bad idea? Let’s discuss.
There is no one-size-fits-all answer, it depends on your personal circumstances. Let’s take a look at the pros and cons of student credit card options and hopefully when we’re done, you’ll feel more confident making decisions about credit cards and be one step closer to your financial goals.
Benefits of Credit Cards for College Students
The spending power of a credit card can seem a bit scary at first. All of the sudden, you’re learning how to budget, making financial decisions, taking on debt. It’s all so… adult-y.
That’s alright, though… adulting isn’t always as difficult as it seems. You’ve got a BFF (Best Financial Friend) with us, here at UMe. We’re happy to help you navigate these new-to-U financial waters!
The sooner you can establish credit, the better. But, there are some best practices we want to make sure you’re aware of.
So, how can a credit card get you ready to take on the world? Let’s start with credit.
Build credit history
Speaking of history, you’re going to need one. Credit history, that is.
Your credit history is your ongoing track record of taking on debt and paying it off on time. This credit history is how you develop a credit score ( aka: a three-digit number that tells lenders how credit-worthy you are). Credit scores can range between 300 to 850 (Spoiler Alert: the higher the number, the better for U!), and the factors that make up your score are:
- Payment history
- Current debt
- History of borrowing and paying back debt
- Number of loans applied for recently
- Different types of credit taken on (auto, mortgage, credit cards, etc.)
The three major credit bureaus – FICO, Experian, and Equifax – keep track of your credit history, and each will rank you with their scores. The better your score, the more likely you are to get an affordable car loan or mortgage rate (talk about adulting!).
The credit bureaus weigh some of these things more than others. For example, FICO puts the most weight on your payment history (over a third of your credit score), followed by your existing debt (slightly less). Then other factors – length of debt, new credit, and types of credit – each of these makes up about 10-15% of your score.
So when you get a credit card – your best course of action is to only use it to buy things you have budgeted to buy – and make timely payments for at least the minimum amount and you’ll be on your way to establishing a good credit history. (UMe Pro Tip: We advocate paying the entire balance on your card each month, so you won’t pay any interest fees on your purchases.)
Learn to budget
An added benefit to a credit card is the real-world budget experience you get. When you have to pay off your balance each month, you know you have to set money aside to make payments.
Not only that, but you can look at your credit card statement to track your spending. A great rule of thumb to follow is don’t spend more than you can immediately pay off. That will keep you out of debt you can’t pay off.
Emergency preparedness
Just because you have a credit card doesn’t mean you should use it frequently. It can also be used very sparingly and only in case of emergencies.
Things happen, and sometimes you need to spend more than you’ve got on short notice. Say your car breaks down unexpectedly and the repair costs are more than you can afford at the moment, that’s where a credit card can come in handy. It can be a relief to know that you have options, should you need quick access to funds.
Potential Downsides
The whole point of a credit score is to prove to lenders that you’re someone they can trust to make responsible financial decisions. In return, they’ll not only give you the loan you’re applying for, but you’ll usually enjoy lower interest rates because your lender isn’t worried about you not paying them back in full or on time.
Be sure to think before you swipe. Ask if the thing you’re buying is a want or a need, if it’s something you’d rather save for, or if it’s something you can pay off in a timely way. You can get yourself into a financial bind if you purchase without thinking.
When applying for a credit card, it’s a best practice to examine your spending habits to make sure you are making good spending choices. A piece of plastic isn’t a blank check!
Use Your Credit Card Responsibly and Be Amazed!
When you have a credit card that you use responsibly, you can build a solid credit history that you will be proud of, and one that will help you achieve more of your financial goals! Create a budget and stick to it, make your payments on time, and you’ll be on your way to establishing a reputation as a solid, low-risk borrower.