A college student’s guide to credit cards and how to use them wisely.
Most adults have seen credit card offers online, in an email or sitting inside their mailbox. While most offers end up as junk mail or are easily passed over, some offers may be worth considering. How do you know if a credit card is right for you?
Bruce Johnson is an adjunct instructor for the Ness School of Management and Economics at South Dakota State University. He teaches FIN 280, a personal finance class, where one of the topics he discusses is credit cards.
“The only good reason for having a credit card as a young person is to build credit,” Johnson said.
Credit isn’t exactly something college students ponder. However, your credit score may be more important than you think.
Your credit score identifies risk and how responsible you are managing money. When you go to obtain a car loan, a mortgage or a loan for a business, your interest rate is determined by your credit score and report. The higher the score, the lower the risk.
Before Johnson went to college, he went into the U.S. Marine Corps. He had strict instructions from his father to not get a credit card. After his service ended, Johnson worked for a credit card company processing credit cards. When he looked to purchase a home, Johnson discovered he had not built credit and would be unable to obtain a mortgage, as credit cannot be build overnight.
“If you have no credit … and get a credit card, you will start somewhere in the 600s. You want to be in the 720s to 740s at least,” Johnson said. “Nobody knows exactly how the credit scoring model works.”
Johnson also reminds students that the key to safe credit card practices is to use it only to build your credit, and to NEVER as a loan.
“Buy one item once a month at $50 or less and pay it off when it comes due,” Johnson said. “If you don’t have a steady income, you don’t want to be charging it up. You don’t want to be using it much.”
Not only will you injure your credit, but you will be paying more money to your credit card bill than you would purchasing an item outright.
Credit cards are revolving utilization and have a limit as to how much you can spend. Balances not immediately paid are charged high interest rates on top of the principal.
“There are almost no credit cards that have anything less than double-digit interest rates. Odds are when you are done paying it off, you are paying double what you have borrowed,” he said.
It’s important to research what card is the right fit for you, and which one will over you the best terms.
“Shop around. Don’t apply for something just because it came in the mail,” Johnson said.
Moral of the story?
Only spend what you can pay, use a card safely to build credit and research offers to ensure the card fits your needs.