Between schoolwork, extracurricular activities and social lives, we’ve got a lot on our minds. Right now, making it to that AM class is higher on our list of priorities than how we’ll be paying for our first home years down the road (not that we don’t already have our dream homes planned out).
Thinking long-term now, however, really matters—especially when it comes to finances. We know what you’re thinking: the importance of managing money is old news, and that’s why you spend wisely (most of the time) and most of all, stay far, far away from credit cards.
Turns out, now is the time to start building credit, and that means plastic.
Why is it important to start building credit—now?
You’re attached to your credit history your entire life, whether you like it or not. According to Brandon Farestad-Rittel, a college-savings expert for Kinoli Inc., though it’s possible to correct past mistakes and improve your credit score, “it takes years to repair a poor rating.” While you’re in college, you’re most likely not making large purchases, so it can be good to start using a credit card when you’re not spending a lot, meaning it’s more feasible to make your payments, which leads to good credit.
In addition to ensuring a good credit history or offering yourself additional time to repair mistakes before good credit really matters (like when you’re buying a house), coming out of college without a credit history may be detrimental to your ability to borrow money, whether you’re buying a car or paying for grad school.
“Without any credit history, most reasonable lending options are inaccessible,” Farestad-Rittel explains.
Picking a credit card
With all the types of credit cards that are available today—rewards cards, in-store cards and more—how do we know what kind of credit card is the best fit for our needs?
Ask yourself what your spending habits are. Will you be putting all your purchases on your credit card, or only larger ones like plane tickets? If so, one with fewer rewards benefits may suffice, as many cards that provide rewards require a certain amount of spending or may charge annual fees. What does the majority of your spending go towards: groceries? clothing? If there’s one area where you spend the most, choose a card that has points and rewards geared towards those spending habits. And what do you want your card to do for you? Some cards offer extended warranties (they’ll cover warranties for longer than vendors will, such as on laptops) and others provide identity theft protection. Every credit card website offers charts on what they do and don’t offer, and websites such as creditcards.com allow you to compare these charts side-by-side.
“Generally, credit cards issued by companies like MasterCard or VISA are preferable. They tend to have lower rates and offer additional rewards and benefits,” Farestad-Rittel says of cards issued by large, reputable companies over smaller, in-store credit cards.
In-store cards, he says, typically have higher interest rates, and are beneficial only when you’re using them on purchases you’d make anyway. So if you’re a traveler, a Delta Skymiles card might serve you well, or if you’re a frequent shopper at Victoria’s Secret, you might as well get the points for shopping—so long as you’re paying off the balance in full each month so you’re not overwhelmed with interest.
When picking your plastic for the first time, Farestad-Rittel suggests starting with just one credit card—especially if you’re opening a card on your own, because it’ll be easier to manage payments (it can be easy to forget how much you’ve spent on which card!) and avoid letting your debt get out of control.
Many credit card companies offer student accounts, such as the Discover Student Card and the Chase Student MasterCard. These cards are designed to help students build credit and typically carry lower interest rates, lower late payment fees and no annual fee. Those with rewards have point systems based on purchases students already make, such as books, dining, gas and entertainment.
“If you’re lucky enough to have parents paying for expenses, ask about becoming an authorized user on their account,” he says. “You’ll get a card in your name and a boost to your credit, but responsibility for the bill still falls on your parents.”
Have your parents call their credit card company to add you as an authorized user. If your parents are registered for an online account attached to their credit card, many companies allow you to add authorized users online. If you are opening your own account, check your (snail) mail first, because many credit card companies send promotional offers through the mail—so what you once thought was solicitation could really mean lower interest rates or cash back. In-store credit cards can be opened in store—any sales associate should be able to assist you.
Credit card companies don’t have your address? No problem. Once you’ve decided what kind of card you want, each company’s website will have an online application you can fill out, and you’ll receive a decision in minutes.
Knowing the fine print
Each credit card application comes with fine print, and it’s important to know the details of what you’re signing up for.
- Interest Rates: You will be charged interest when you don’t pay off the balance on your card—each time you use your card, you are essentially borrowing money, and interest accrues when you don’t pay that money back. There are two types of interest rates: variable and fixed. Variable rates are based on the “prime rate,” a rate the Federal Reserve charges banks for borrowing money. So as the Federal Reserve charges higher or lower interest rates to banks, your interest rate on your credit card will change to reflect that. Fixed rates, on the other hand, are not tied to the prime rate, so the interest rate is much more constant, meaning you’ll have a better idea of what you’ll be charged should you not pay off the balance on your card. Some cards may have introductory offers that provide low or zero-percent interest, so be sure you know how long the offer lasts.
- Late-Payment Penalties: Will the credit card company charge fees with just one missed payment, or is there a grace period? And do these fees increase with each missed payment? Make sure you know the penalties of late payments and compare these consequences from card to card.
- Credit Limit: The credit limit on a card is how much you’re allowed to borrow—and this is usually based on a number of factors, such as your spending habits and your annual income. They typically start out between $500-$1,000, but if you make payments on time each month and pay off your balance in full, your credit limit will increase. Be careful not to choose a card with too high of a credit limit to begin with—it’ll leave room for debt to go beyond control.
- Transaction Fees: Will you be charged for cash advances, such as when you withdraw money from your credit card at an ATM? Exceeding the credit limit? Making international purchases? Transferring balances from one card to the next? Make sure you know where your money’s going before you complete your application and agree to the terms.
“Read all of the fine print,” Farestad-Rittel stresses. “It takes a little while, but it’s your money and reputation on the line.”
Especially if you’re a first-time credit card user, have your parents look over the card information; chances are, they’ve learned all the ins and outs of credit card companies and can help you decide between cards.
Maintaining a good credit score
The whole reason you signed up for a credit card was to build a good credit history—so make sure you maintain that goal! Spend responsibly, and so long as you’re making the minimum payments, your credit score should remain in good standing. According to Farestad-Rittel, however, some lenders see a history of making minimum payments alone as an added risk, so it’s better to pay off your balance in full each month. “It appears as though you were extended to the brink of your ability to pay. Making minimum payments will also cost much more money in the long run as interest adds up quickly,” he says. Doing so, he adds, will also benefit your credit-to-debt ratio, which is how much debt you owe compared to how much available credit you have.
“If you have a card with a $2,000 limit and a balance of $1,000, the credit-to-debt ratio is 50 percent. Making more than the minimum payment will reduce this ratio and lenders will see you as less of a credit risk,” he explains.
Though late payments or skipped payments are most damaging to your credit score, there are other things that can downgrade your score as well. Applying for a large number of credit cards is a common problem—with each card, Farestad-Rittel explains, the issuer runs a credit inquiry that shows up on your report—and multiple credit inquiries makes you look desperate for credit.
“Holding several low-limit credit cards is harmful as well,” he says. “It shows you already have a hard time finding credit and are likely overextending yourself financially.”
Also, multiple applications can mean multiple denials, and numerous failed attempts to obtain credit cards are red flags for lenders, he says. Multiple cards also lead to multiple closures—which are damaging to your credit report as well.
“If you have one card with a high balance and close other cards with no balance, your credit-to-debt ratio can jump way up,” Farestad-Rittel says.
As @TrendyProblems once tweeted, “It’s all fun & games until you find yourself in more debt than the U.S. Government”—so whip out that plastic, but spend wisely, and one of these days you’ll be able to finance your dream BMW.
Brandon Farestad-Rittel, Kinoli Inc. College Savings Expert