The average American is doing one of two stupid things with credit cards. They’re either using them irresponsibly (i.e. racking up too much debt, not paying it off), or they’re not using them at all. Both of these options can be disastrous. As a college student, you probably haven’t been fully immersed in the credit card fiasco that the rest of the country’s in. (We’ll talk more about this in just a second.) Instead, you’re just beginning to get credit card offers sent to you in the mail, explaining that you – as if by divine providence – have been chosen to receive and wield this powerful, plastic tool.
In order to best navigate the twists and turns of the credit-card-carrying world, let’s go through some guidelines to keep you on the straight and narrow. Credit cards can be powerful devices. But you’ll need to use them carefully.
The Two Greatest Credit Card Blunders
#1. Credit Card Abusers
The most common error is that people tend to use their credit cards recklessly. Of the Americans who have monthly credit card debt, the average outstanding balance is $15,609. Let’s break that down for a moment to provide some context. If your credit card has a 13% interest rate on a balance of $15,609, and you decide to pay the minimum balance on it each month, it’ll take you 375 months to get rid of your debt. And in that time, you’ll accrue $16,430.96 in interest. That’s right. Not only will it take you over 30 years to pay it off, it’ll also cost you more than the original balance in interest! Take a look at this helpful calculator to map out the impact of your own credit card debt.
16 grand is a lot of money. You could use it for a down payment on a house, or to buy a nice car or to pay off student debt. (If we’re looking at averages, you’re leaving college $35,000 in the hole.) There are so many options. But instead, these wild credit card users shoot themselves in the feet with their poor financial habits.
#2. Credit Card Abstainers
The much less common side of the spectrum is the group that refrains from using credit cards altogether. Out of the two groups, this is the much less sinister. This group thinks, “Hey, credit cards cause people to be in debt, so I’m not going to use them at all.” Sure, this seems good at first glance, but in the long term, this move could seriously damage your credit score.
Yes, credit cards make up a large part of your credit score. Your credit score is directly related to many factors, such as the types of credit you have and the length of your credit history. Check out this video about the importance of credit scores. Without credit cards, you weaken your credit, which in turn, means you’ll be less likely to qualify for a loan later in life.
“But do you actually need a credit score? Isn’t it possible to live off the credit grid?” These are the main arguments you’ll hear from the credit card abstainers. Technically, you can live without a credit score, but it’s going to cause you a lot of heartache down the road.
While you’ll hear people talking about credit scores needed for financing cars, or for getting a job, or for getting approved to live in an apartment, the biggest reason you should concentrate on credit is for buying a house. You’ll likely need to get a mortgage for life’s biggest purchase. In order to do this, you need to have good credit. Credit cards are a very necessary ingredient to cooking up a great credit score.
Getting Mixed Signals?
At first glance, it’s hard to see the middle ground between credit abstainers and credit abusers. But follow the following ground rules, and you’ll be on the path to using your credit card responsibly.
Budget or Die
Using a credit card responsibly is all about discipline. You need to know where your money’s going each and every month. The only way to do this is by setting up a budget. Not good with numbers? Use a free budgeting site like Mint.com to do the hard lifting for you. Remember, a good chunk of the country is floundering from credit card debt, and there’s a good chance they got there by living above their means. If you’re going to have a credit card, you need to first develop financial discipline.
Need Credit to Get Credit
For some credit infants, being approved for a credit card can be a challenge. Credit card companies want to see that you’re a good risk, and so far, you may not have much of a credit history. This isn’t your fault of course, but it’s a hurdle you’ll likely have to jump. The best course of action is for you to become an authorized user on your parents’ account. This means that you’ll be able to have a credit card because of your parents’ credit history. Dear Mom and Dad, if your child is an authorized user, you’ll have the power to monitor their spending.
Not only will this allow you to get a credit card, but if your parents have good credit, your credit will also improve. This kind of piggybacking process is one of the best ways for college students to beef up their credit scores.
Pay It Off…for Real
Out of all of the advice in this article, this is the most important. You need to pay off your credit card balance in total every month. This will allow you to have the credit score benefits without having the pains of interest payments.
Paying off the whole credit card balance each and every month hasn’t been a popular viewpoint historically. But look where “popular” got the last generations. They’re being strangled by credit cards. You don’t have to be if you’re managing your cards right. And in this case, management means paying them completely off.
Some will say that certain financial emergencies require you to hold credit card balances for at least a couple months. And while there are exceptions to every rule, the vast majority of these credit card complainers probably didn’t budget properly. Seriously, only 32% of Americans track their income and expenditures every month. That’s just sad.
So pay if off. Always. In fact, if you budget properly, you should be able to use your credit card like a debit card. Just pay it off at the end of the month (every month).
Getting to the Points and Rewards
We hear about these enticing rewards on all of the commercials. The spokesperson talks about “miles” and “double your rewards” opportunities, but what does all that actually mean? In most cases, the credit card points aren’t as grand as they seem. For instance, my personal Capital One credit card gives me 1.5 points for every dollar I spend. But when you look at the actual value of the point, it comes out to about $1.50 for every $100 spent. That’s not anything to write home about. Jennifer Garner may be excited about the lack of blackouts, but if I’m only making a few bucks a month, I’m not going on any world-travelling excursions any time soon.
Don’t get me wrong – points and rewards are great. But you shouldn’t go into debt in order to rack them up. So earn your points, but don’t compromise your budget in the process.
Now that you know the basics, take some time to set up a budget and get to work on your financial foundation. This should definitely include credit cards. If you’re looking for the right credit card, check out this article about some of the best credit cards available to college students.
And if you have any questions or comments about the credit card process, go ahead and leave them in the section below.
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