It’s an exciting time! Back to school seems to bring with it a great sense of freedom, especially for college students. Students are heading away from home, living on their own, and starting life. College also represents that time that students are beginning to experience financial individuality — moving away from the financial habits of their parents.
One of the first things that many college students do is apply for a credit card. There’s nothing wrong with looking for a good student credit card, but you do need to understand a few things about credit cards in order to avoid falling into the debt trap.
Here are 5 things college students need to know about credit cards:
1. A Credit Card Doesn’t Represent “Your” Money
Many students mistakenly think that a credit card represents some of their available cash. This is not so. A credit card represents someone else’s money — albeit money that is made available to you. When you use a credit card, you are borrowing money. This means that you will have to repay it. And, if you don’t pay off your balance every month, you will be charged interest. Don’t think of a credit card limit as your available funds; look to your checking account for a more accurate picture of what you really have.
2. Credit Card Rewards are Worse than Worthless if You Carry a Balance
There are rewards credit cards out there designed for students. The MBNA Studentawards MasterCard is just one option. These credit cards are designed to be easy for students to get, and they offer you the chance to get free stuff as you earn reward points. However, you should understand that spending just to get the rewards is a quick way to debt. If you don’t pay off your credit card each month, the interest you pay will quickly overwhelm the value of your rewards — they become worthless.
3. Using a Credit Card Now Can Help You Buy a Home Later
It’s not say that credit cards are all bad. Indeed, they can be great financial tools. However, you have to be smart about the way you use them. Credit cards are the quickest way to build up your credit. And, with good credit, you will find it easier to buy a home (or get other loans) with better terms. Use your credit card on occasion, to buy things that you can afford. Then, pay off the balance every month, before interest begins accumulating. You’ll build a good credit history, without getting into debt.
4. Paying On Time Is Vital
You want to build good credit with your credit card, so you need to make on time payments. If you are late, that is recorded in your credit history, and counts against you. Make sure that you pay on time every month. At the very least, you should pay the minimum required (but it’s much better if you pay off the balance each month). You can manage your account online in order to avoid the problems that can come with the mail.
5. Not All Credit Cards are the Same
Realize that not all credit cards are the same. While you may not be able to get the best credit card on your first try (you need a good credit history for that), you can still get the right card for you. Think about your financial style, and what you might need in a credit card. Start with a student card, and use it responsibly. As you build your credit history, you will become eligible for other, better credit cards, and you will be on the right financial track.
This post was included in the Totally Money Carnival at Bank Nerd and the Festival of Frugality at Sweating the Big Stuff.