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How to Build Credit in College

College is a transition to independent adulthood for most of us. While some of us already manage personal finances, many of us may just be starting out. Did you know that getting your own cell phone plan, or having internet installed in your apartment, may require a credit check? While they may not be extensive credit checks, it speaks to the importance of having a strong credit history for everyday necessities.

If you’re eyeing a post-graduation future with a house and a car--or even renting an apartment without the help of a parent--you may want to look at establishing credit now, while you’re still in school. A credit history is something you will need to build over time, and one way to do that is with a credit card. Credit cards for college students have gotten a bad rap in the past, but as long as you utilize credit responsibly it can be a great tool to help you get a head start on life after graduation.

What is credit, why do I need it and how do I get it?

There are companies called credit bureaus (or credit reporting agencies) that collect consumer data like payment history, loan usage, and credit inquiries. They use this data to score consumers. Your credit score helps a lender determine how much of a risk you may be if they gave you a loan or line of credit. They want to ensure they get their money back, right? So, unless you have enough extra cash to make big purchases (like a house or car) in full, you probably need to start building credit to prepare for the future. Getting and responsibly using a credit card is a simple way to start doing that.

How to get your first credit card as a student with no credit?

When choosing a credit card it is important to look for hidden fees. This is yet another scenario when it pays to be a college student. Credit card companies are absolutely aware of us and our need to gain credit- therefore they have credit cards for college students that are adapted specifically to our needs.

How do you tailor a card to college students? With relevant perks and programs such as no annual fees, bonuses for good grades, and rewards that can become real cash, to name a few. There are even secured credit card options which means you usually put down a deposit to help ensure you use your line of credit responsibly. Think of it like a security deposit on an apartment (this is not the same as a pre-paid credit card) . If you are worried about getting a credit card with limited or no credit, most companies will offer an option with a sensible credit limit if you sign up with a cosigner.

The key here is to find the best option for you when choosing your first credit card. This is not a one size fits all situation, but luckily there are plenty of choices! For example, if you travel a lot or go to school far from home, it may be wise to choose a credit card that earns you points for flights. These are known are rewards cards, which “reward you” for using their card for purchases. The way they work is they will provide you with a reward like cash back, airline miles, or points which can be redeemed. Redemption can take on many forms or be spread across a variety of providers (like airlines, stores, hotels, gas stations, etc.), or they may only offer a reward for a specific program or store.

Similarly, there are store credit cards for places where you shop, including Amazon, BestBuy, Kohl’s, and many other department stores. These cards will only allow you to shop the approved retailer (likely the store associated with the card) and they allow you to earn discounts. These cards sometimes offer you access to additional discounts or card member exclusive benefits.

Credit Card APR (Interest Rates), and Fees

When you’re picking a credit card, you need to be aware of the APR (a.k.a interest rate) and any associated fees. Despite seeing 0% introductory rate offers, there’s really no such thing as a credit card with no interest rate*, but it’s important to compare different credit card terms and see if there are any fees before you sign up.

Since you are just starting out, the interest rates you’re being offered may be high. For a college student, just starting to build credit, don’t be surprised if you see some interest rates over 20%. And if you use that credit cards for a cash advance (basically use it to take out money), it is likely higher than your interest rates on purchases. The amounts should be spelled out in the cards terms and conditions.

Other things you should look out for, annual fees. Annuals fees are charged to you, the credit card owner, every year and it is not applied to your outstanding balance. An annual fee is essentially the reoccurring cost for you to own that particular credit card. At some point in your life, you may consider a card with an annual fee, but you want to make sure you get a credit card you can afford when you’re first starting out.

*Some credit cards will offer perks for you to get their card, like no interest for 18 months. However these perks will only be offered for a limited time, and have their own set of conditions. These perks may be a deciding factor, but know that they will not last forever so you should still note the card’s interest rate after the promotional period.

How to use a credit card?

This is where you must approach credit with care and caution. Only apply for and open credit card accounts to buy things you would normally purchase anyway, or to charge things for convenience but in amounts you can pay off within a month). The biggest pitfall to watch out for is keeping your spending under control! Don’t let your available line of credit become debt.

The basic principle to follow is this: don’t spend what you don’t have! That’s it. Using a credit card may make it easy to buy expensive items, but if you aren’t paying your bill (in full) on time, those items will become even more expensive over time due to the interest you’ll accrue on unpaid balances. Even if you cannot afford to pay your bill in full each month, make sure you pay more than just the minimum monthly payment due. This will help to reduce the overall interest you pay and will also help to lower your credit utilization rate (essentially the ratio of your outstanding credit compared to your credit limit—this can be looked at per credit card, as well as assessed based on all your outstanding credit compared to your total credit limit), which is an important indicator on your credit score.

If you stick to purchases that you need (i.e., the stuff you normally buy) and earn rewards or cash back for them, you can use those perks to treat yourself later. Beyond the airline miles or Amazon rewards, responsible credit card use will also begin building up that all-important credit history mentioned earlier. When the time comes to buy a car or a home, your credit score will help you qualify for loans and interest rates that will help you build your dreams.

Make sure to avoid common credit card mistakes:

  • Spending more money than what you can afford to repay quickly
  • Maxing out your credit limit
  • Losing track of your spending
  • Only paying the minimum amount due
  • Missing payments
  • Having too many credit cards
  • Applying for multiple accounts (This can be a problem because credit companies consider the number of credit inquiries in your name within certain periods of time.)

Should college students have credit cards?

That is the question here, isn’t it? My answer: yes. College can be a great time to get a credit card and start building your credit but you have to be smart about it. Using a credit card to buy things you can’t afford can quickly turn into a mountain of debt. Make your payments on time and in full each month, and you’ll be building the foundation for a solid credit history to see you through college and beyond.

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