What should college students look for when choosing a credit card?
One of the first steps is to not get too eager when applying for a credit card, Huynh advises. “Research shows that trying to open several credit accounts in a short period represents greater credit risk,” he says. “There is a relationship between credit risk and the number of credit inquiries: The more inquiries one has, the more likely he or she is to default on credit obligations.”
To narrow the field, look for the most obvious perks, such as no annual fee and cash-back rewards, which you know you’ll take advantage of. A low interest rate is another thing to consider. All three experts recommended paying balances in full each month, which makes the rate less important, but if you think you might slip, a lower interest can cushion the fall. Pacheco advises looking for a card with an introductory zero percent interest rate. “Zero percent interest cards are usually for a limited time, like six months or a year, so a card like this is good for a student to test their ability to pay their credit card off in full each month,” she says.
What should college students avoid when choosing a credit card?
High annual fees are a red flag, says Philpot, as are promotional perks that look good but aren’t that applicable to daily life — such as airline miles when you know you won’t be traveling. And even though introductory interest rates for purchases and balance transfers can be tempting, it’s important to be aware that they will expire — and you’d better be ready when they do.
If students don’t have enough income to cover expenses, it’s best to avoid applying for credit. “College is a time of self-discovery for many people,” says Pacheco. “Honestly evaluate yourself, and if you know that you are bad or inconsistent with managing money, avoid getting a traditional (unsecured) credit card and opt for a secured credit card. Or simply focus on using your debit card and avoid a credit card for the time being altogether.”
Getting a cosigner is a way to put a safety net in place, and in fact, credit card companies cannot issue cards to applicants under age 21 without an adult cosigner or proof of adequate income. However, Huynh says, “It is more than possible to manage finances well, and start to build credit, with a checking account and no credit card. If the student can qualify for a credit card without a cosigner, that is a better route. If the card is a vehicle for a student to develop their credit history, doing it independently will be a far better teaching mechanism than having a fallback cosigner.”
What are some tips for college students on using credit cards responsibly?
It’s best to know your limits and pay attention. Pacheco advises applying only for as much credit as you know you can handle to pay off balances in full each month — any more is an invitation for trouble. Make a budget and use your phone to send text or email reminders of when charges are due. Philpot offers the following advice: “Use the card regularly, but sparingly. For example, use the card only for gasoline purchases; this limits the purchases yet shows regular activity. Later creditors like to see this.”
Huynh notes that setting clear parameters for a card can help. “Some families agree on a student having a credit card for emergencies only. Some parents provide a set monthly amount that can be spent. In other cases, students are completely responsible for all purchases and payments,” he says. “Whatever the rules are, it can be a smart idea for students to avoid using a credit card for discretionary expenses such as clothing, movies, coffee, dining out or happy hours.”
If students have not used credit cards responsibly, what can be done to correct the situation?
It’s best to set a budget before beginning to use a credit card, but if it’s not working, try again, keeping things as simple as possible so you’re less likely to get off track. Students who know they’re likely to give into spending temptations can take other precautions, such as starting with a secured credit card, or by not carrying it around regularly. Make a pact with yourself to only use it for real emergencies. Even low-tech methods like freezing the card in a block of ice can be effective; the time it takes to thaw is enough to reconsider — and perhaps resist — an impulse buy. However, “Think twice about canceling a credit card with a long positive history,” says Huynh says. “The longer you hold a card, the more valuable it is in your credit score determination.”
If you get into deeper trouble, don’t try to avoid the problem. “See a credit counselor,” advises Philpot. “They can give you specific advice for your situation. The most reputable ones are not-for-profit organizations and do not charge fees. And talk to your credit card issuers. Lenders generally would rather work with their troubled borrowers than let them go into default. The lender may be able to lower your rate, change your payment calendar, etc.”
What else should college students should keep in mind about credit cards?
Approaching credit card use wisely can be convenient, economical and a way to build a sound financial history. But they’re tools in a financial process, not gifts of free money. “In the tool analogy, they are like a table saw,” warns Philpot. “With careful and skilled use, a table saw can do wonders; under reckless use it will amputate fingers and limbs.”
Eventually, credit use — good or bad — will catch up with everyone. College students in particular have a chance to establish their history for a smoother financial road in the future — as long as they stay savvy about the risks.