As a student, you stand at the doorway of your financial journey. You are probably learning to handle money for the first time and making decisions that will affect your financial future. Of importance in this journey is how one understands and manages credit. Good credit management opens opportunities, while bad ones can raise barriers for years.
This tutorial introduces you to the world of credit as a student. We will discuss everything about credit, from the basics to practical tips for maintaining good credit. Whether you are a freshman or a soon-to-be graduate, this tutorial will provide important information to help you make better decisions about credit and ensure financial success.
Understanding Credit: The Basics
What is Credit?
Credit refers to the facility of drawing on a loan in monetary form or any other form of goods and services, whose repayment is usually made later. It is, in essence, derived from trust- the trust of the lender that you will repay what you borrow.
Why is Credit Important for Students?
As a student, good credit will help you qualify for better terms when taking loans meant for students, easily renting an apartment, and getting approval for a cell phone plan.
- Possibly get jobs, as some employers look at credit
- Be more prepared to make big purchases later on in life, such as cars and houses
How is Credit Measured?
Credit is usually measured through credit scores. The most common is the FICO score, which ranges between 300 and 850. The higher the number, the stronger the individual’s creditworthiness.
Starting Credit as a Student
Should Students Have Credit Cards?
This is a personal decision, but having a credit card, if used responsibly, can be a good means of building credit.
Benefits of Student Credit Cards
- Build credit history
- Offer financial flexibility
- Include rewards and benefits
- Be a tool for one’s financial education
Drawbacks of Student Credit Cards
- Ability to accumulate debt
- High interest rates may apply
- Overspending
Types of Student Credit Cards
- Student Credit Cards: For college students, they typically offer credit at a lower threshold.
- Secured Credit Cards: These require a cash deposit, which usually becomes your credit limit.
- Store Credit Cards: These are issued by stores and are often easier to obtain. They tend to have very high interest rates.
- Authorized User Status: You become an authorized user on your parent’s or guardian’s credit card account.
How to Pick Your First Credit Card
To select your first credit card, focus on the following:
Annual fees
Interest rates
Rewards programs
Credit score requirements
Reporting to all three major credit bureaus
Building Credit as a Student
Getting Started with a Secured Credit Card
A secured card is an excellent alternative if you cannot qualify for a standard student credit card.
Here’s how that works:
- You put down cash upfront (say $200)
- Your deposit equals your credit limit
- Use the card like any other credit card
- Make your payments on time and watch your credit build
Become an Authorized User
If one of your parents or guardians has good credit, being an authorized user on their account can help you establish credit.
Benefits:
- their positive payment history could show up on your credit report
- You can benefit from their good credit without being legally responsible for the debt
Things to Consider:
Make sure the primary cardholder has a good credit history. Also, ensure the card issuer reports authorized user activity to credit bureaus.
Take out a Credit-Builder Loan
A few credit unions and online lenders have specialized credit-builder loans designed solely to help you build credit in mind.
How It Works:
- You get approved for a small loan amount.
- The money goes into a savings account.
- You make monthly payments to “repay” the loan.
- You get the money when it’s fully paid off
Pay Your Student Loans on Time
If you have student loans, your good credit will be built when you make on-time payments.
Tips:
Setup automatic payments to avoid missed due dates
Reach out to your loan servicer regarding an income-driven repayment plan if you are having a difficult time making your payments
Using Credit Responsibly
Make a Budget
A budget helps you handle your money and use credit responsibly.
Steps to Create a Student Budget:
- List all sources of income (part-time job, allowance, etc.)
- Track all expenses (tuition, books, food, entertainment, etc.)
- Categorize expenses as needs vs. wants
- Set spending limits for each category
- Review and adjust regularly
Use Credit Cards Wisely
Credit cards can be powerful tools when used correctly.
Best Practices:
- Pay your balance in full each month
- If you can’t pay in full, pay more than the minimum
- Keep your credit utilization less than 30%
- Automatic pay: eliminates late fees
- Review statements regularly for errors/fraudulent charges
Understand Credit Utilization
Credit utilization is how much credit you use within your credit limits. It’s one of the big factors in determining your credit score.
Tips for Managing Credit Utilization:
-keep your utilization less than 30% for each card and overall
-make multiple payments throughout the month
-request credit limit increases as your credit is improved
Avoid Common Credit Mistakes
Too many students slip into credit traps. Here are some to avoid:
- Maxing out credit cards: This will severely hurt your credit utilization ratio and could lead to debt.
- Missing payments: Not paying by payment due dates will severely damage your credit score.
- Too many card applications: Several applications within a short period reduce your score.
- Not checking credit reports: Checking your reports regularly can help you detect mistakes and fraud that may hurt your credit score.
- Co-signing for friends: You will be responsible if they default on payment.
Credit Reports and Scores: How Do They Work?
What’s in a Credit Report?
Your credit report includes:
- Personal information
- Credit accounts and payment history
- Public records (such as bankruptcy)
- Recent credit inquiries
How to Get Your Credit Report
You are entitled to one free credit report every year from each of the three major credit reporting companies: Equifax, Experian, and TransUnion.
To Get Your Free Report:
- Visit AnnualCreditReport.com
- Fill in the required information
- Choose which reports you want to see
- Answer security questions to verify your identity
How to Read Your Credit Score
Your credit score is a number that represents your creditworthiness. The most common score used is the FICO score.
Factors That Affect Your FICO Score:
- Payment history (35%)
- Credit utilization (30%)
- Length of credit history (15%)
- Credit mix (10%)
- New credit (10%)
Monitoring Your Credit
Monitoring your credit report and score regularly is important for maintaining healthy credit.
Benefits of Credit Monitoring:
- Catch errors or fraudulent activity early
- Know what moves your score
- Compare with time
- Areas to work on
Handling Credit Issues
How to Handle It If You Can’t Pay
If you find yourself unable to make a payment for credit cards or any other loan, then:
- Call them right away
- Explain
- See if they offer some form of hardship programs or plans
- You can also contact a credit counselor
What to do if you find an error on your credit report:
- Gather supporting documentation
- Write a dispute letter to the credit bureau
- Attach copies-not originals-of your proof
- Send it by certified mail with the return receipt requested
Dealing with Identity Theft
If you suspect you are a victim of identity theft:
- Place fraud alerts on your credit reports
- Contact your creditors
- File a police report
- Consider placing a credit freeze
- Contact the Federal Trade Commission about the theft
Planning for the Future
Positioning Yourself for Life After Graduation
As graduation approaches, start positioning yourself for long-term financial wellness.
Things to Do:
- Determine and come up with a plan to pay off your student loans
- Start building an emergency fund
- If you have established good credit, consider opening a reward credit card
- Consider larger purchases you would like to make in the future (car, house) and how credit will affect these
Understanding Long-Term Consequences of Credit
How you manage credit as a student will have long-lasting consequences.
Potential long-term impacts include:
- Apartment rentals and home purchases
- Car loan terms and interest rates
- Employment
- Insurance rates
- Future borrowing power
Continuing Financial Education
Financial education does not have to stop at graduation. For this purpose:
- Read personal finance books and blogs
- Financial workshops
- Budgeting and credit monitoring apps
- Seek a financial counselor when needed.
Conclusion
Being a student does not exclude one from practicing good credit management principles. You will be well on your way to bettering your future if you can understand the basics of using credit responsibly and avoid common pitfalls that often mislead people into making bad decisions regarding their credit.
Take note of the following:
- You should begin building credit early but responsibly
- Use credit cards wisely – pay on time and in full where possible
- Keep your credit utilization low
- Monitor your credit reports and scores regularly
- Devise a budget and follow it
- Plan for your financial future beyond graduation
Credit management takes time and discipline, but it’s well worth the benefits. Make informed decisions about credit through your student years, and don’t be afraid to ask for help where you need it. Your future self will thank you for building a solid financial foundation now.
Remember that no two people can have the same financial journey, and what applies to one person might not apply to another. It is all about being informed, making conscious choices, and keeping your long-term financial health in mind. With these tools and knowledge, you will be better equipped to deal wisely with credit as a student and beyond.
