One of the firsts that many students experience in college is getting a starter credit card. Getting a credit card is an important step toward financial independence. It can help you build positive credit, which can later help you buy a new car or qualify for a mortgage.
While student credit cards can offer real benefits, they also come with some risks. If you get a card and don’t use it responsibly, you can make mistakes that can impact your finances for years to come.
With that in mind, here are seven starter student credit card mistakes you should avoid.
One of the biggest mistakes first-time credit card holders make is treating their credit card as if it’s free money. Your credit card is meant, first and foremost, to be a tool of convenience. It allows you to pay without carrying cash. It may also help you earn cash back, points, or airline mileage.
To avoid overspending, use your credit card to pay for things that you can afford anyway. If you think of it as a tool to help you build credit, then you’ll be less likely to go overboard and wind up with a mountain of debt you can’t pay.
The balance on your credit card has an impact on your credit score – especially if you’re carrying a balance that’s close to the limit on your card. Your credit utilization accounts for 30% of your credit score. You should keep that in mind when you decide what to charge and what to pay with cash or a debit card.
If you avoid overspending, then you should be able to pay your balance in full each month. Doing so will help you build good credit, avoid finance charges, and avoid being penalized because of high credit utilization.
The next mistake that college students sometimes make with their credit cards is making only the minimum payment each month. If you do that, over time you’ll end up paying significantly more than the balance on your card.
To understand how that works, let’s look at a simple example. Say you have a card with a $1,000 limit and an 18% interest rate. If you make only a minimum payment of $25 each month, it will take you 62 months to pay off your balance and you’ll pay more than $500 in interest. By contrast, doubling your monthly payment to $50 will reduce your payment time to 24 months and your interest to only $197.63. That’s a huge savings.
When your credit card statement comes in the mail, do you simply write a check or log in to make a payment, or do you review the statement before you pay? If you don’t bother to check your statement, you may wind up paying for fraudulent or inaccurate charges as a result.
Credit card companies make mistakes. So do retailers. Even if you’re not a victim of identity theft, you may find mistakes on your credit card bill. Taking a few minutes each month to review the charges and make sure they’re accurate can save you time, money, and future aggravation.
What if one of your friends doesn’t have a credit card but wants the convenience of using one? A lot of college students offer to let friends use their cards. While we certainly like the generous intention behind loaning out a credit card, it’s a bad idea and can lead to real problems for both your finances and your friendship.
The best approach is never to lend your credit card to anybody. If you do, there’s a chance that they won’t repay you and you’ll be stuck making payments for the things they bought. That’s not a risk worth taking, especially when you consider that missing payments can affect your credit for years to come.
Missed credit card payments get reported to the three major credit bureaus. If you are frequently late with your payments, it will impact your credit score significantly.
To get an idea of how big a deal late payments can be, remember that your payment history accounts for 35% of your credit score. That’s more than any other factor. Paying late, or skipping payments, can both have a negative effect on your credit score.
It’s fun to have a rewards card. You can earn points toward merchandise and other desirable items, get cash back on your purchases, or accrue airline miles to use during your travels.
One mistake that first-time cardholders sometimes make is getting so excited about rewards that they sign on for an interest rate and fees that are too high. Make sure that when you evaluate student credit cards, you remember that the interest rate will have a much bigger effect on you than the rewards you earn – and choose accordingly.
Getting your first credit card is exciting. If you avoid these seven mistakes that students often make with their credit cards, then your student credit card can be an important building block in your future financial success.
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