Personal finance knowledge is critical these days. Yet, today, only 17 states require high school students take a class in personal finance. Here are 3 things you need to know about credit cards to avoid common mistakes and prepare yourself for financial responsibility.
According to a April 2016 study, current college students know very little about credit cards and building credit. The report found that 38.46% of college students currently have a credit card in their own name. However, 56% of respondents didn’t even know the current interest rate on their credit card. Also, a startling 46.53% of college students are afraid of the possibility of accumulating credit card debt.
Credit cards are an important financial tool when used correctly. When used responsibly, credit cards can help college students build credit and develop good financial habits. However, when used incorrectly credit cards can leave a lasting negative impact on your financial health.
To better understand consumer credit and credit cards, we asked Nate Matherson from LendEDU to answer some common questions regarding college student credit cards.
When should students get credit cards?
This is a highly debated question. In my opinion, I recommend that college students get a credit card the day after their 18th birthday. Why? Building your credit history takes time, and your length of credit history is a significant factor when calculating your credit score.
I applied and received my first credit card when I was 18 years old. I applied at Wells Fargo and was approved for an unsecured student credit card with a $1,000 credit limit.
I don’t recommend that anyone apply or use a credit card as a way to go on a spending spree. Instead, I recommend that students use credit cards as a tool to build a positive credit history. You can build positive credit by keeping your balances low or near zero, and by making on-time payments each month.
What is a credit score? Why is it important to build credit?
A credit score is a numerical expression based on a level analysis of a person’s credit files, to represent the creditworthiness of the person. A credit score is primarily based on a credit report information typically sourced from credit bureaus.
In other words, you credit score is a number that represents your creditworthiness. The higher the credit score you have, the more creditworthy you are. In contrast, the lower credit score you have, the less creditworthy you are. Banks and lenders use your credit score to approve you for auto loans, student loans, credit cards, and mortgages.
It is important to build good credit as soon as possible. Good credit will give you the power to one day buy your first car or house. In addition, employers are increasingly favoring applicants who have good credit.
How do I manage my credit card bills?
This one is easy. Don’t get a credit card bill!
College students should not use credit cards as a way to spend more money. If you find yourself with a credit card balance each month, you should work to cut down your spending.
Ideally, you should only spend what you can afford. You can manage your credit card bills by avoiding impulse purchases and by avoiding balances.
On-time payments and credit utilization are critical components of building good credit. You can set reminders and automatic payments to make sure that you pay your bill on-time. And, you can even pay down your bill before the end of the month. Unpaid credit card balances will accumulate interest and will lower your credit score.
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