The College Student’s Guide to Building Credit with Credit Cards
Off to college?
It’s summer, which means recent high school graduates are getting ready to embark on their upcoming college adventures. You may already have a packing list of the necessary items your student needs for college, but is a student credit card on there?
Unfortunately, most college students aren’t exposed to financial literacy classes in school and end up learning about personal finance long after they graduate. Life after college is much more challenging for these individuals because they may be unable to get an apartment or have to pay higher deposits for utilities because they have no credit history.
Whether a freshman or a fifth-year senior, college is the perfect time for students to lay the groundwork needed to start building their credit history and develop some strong financial habits so when they graduate, they have the necessary credit and skills to work toward financial success. Still not convinced a credit card should be on your college student’s packing list?
Keep reading to learn more about the benefits of using student credit cards and what cards may work for your student.
Why should a college student get a credit card?
Perhaps one of the most counter-intuitive aspects of personal finance is that in order to have good credit one has to borrow money. While many young people rightly understand that debt can be bad, they miss the broader picture – not all debt is bad, and borrowing to finance valuable purchases (like property or an education) is a necessary evil. On the other side of the coin, irresponsible use of credit is a surefire way to wreck your finances, which is why responsible and planned use of credit is the cornerstone of a good financial life. That’s where credit cards come in.
Using a credit card to pay for purchases that you’ve already budgeted for, like your monthly bills or your groceries, and can pay off before you’re charged interest, is how you go about building credit. While not all credit cards make sense for a college student’s expenses, credit card issuers offer student credit cards which are tailored to the needs of individuals attending school. They also offer features, bonuses and rewards that greatly benefit college students. Before we detail the best credit cards for students, we’d like to note a couple of credit-building tips you may want to pass along to your high school grad or current college student.
Tips for building credit with a credit card
The main rule of building credit is spending within your means and paying off most, if not all, balances in full when they’re due. This is what makes credit cards ideal for recurring expenses, like food and utilities. There are a few other credit-building rules that students should understand. These include:
- Don’t get too many cards. While this isn’t something a new cardholder would have to worry about initially, once their credit is established, they might start getting a ton of credit card offers and some might even be significantly better than their first card. Although it’s tempting to open a number of credit cards with a bunch of different perks, one of the metrics used to evaluate your credit penalizes excessive use of credit. Even if you can afford to manage payments on multiple credit cards, always make sure that you’re cautious about applying for new cards.
- Avoid carrying large balances on your card. Credit is also evaluated by a metric known as a credit utilization ratio, which is a fancy way of measuring how much debt you carry relative to how much credit is available to you. For example, if you have a credit card with a $400 credit limit and a $100 balance, your credit utilization ratio is 25% – divide $100 by $400 to get that. Since you can easily control your credit card spending, focus on maintaining a good ratio on any credit card you carry – ideally you should use up no more than 30% of your available credit used at a given time.
- Don’t close out your student credit card right after graduation. Your first credit card will be a financial linchpin, as one of the most important aspects of credit evaluation is something known as your credit history/ The longer you have and use credit responsibly, the better your credit scores and reports will be. That’s why you should keep your oldest credit account active for as long as possible, which includes your student credit card. Some issuers understand that you will eventually outgrow your student credit card, so they design their student credit cards to turn into a traditional credit card after a certain amount of years. For example, the Discover it Student Cash Back card that does exactly that, as it gives cardholders the opportunity to be considered for a credit line increase and keep all of the Discover card benefits post-graduation.
Which credit cards are best for college students?
As previously mentioned, student credit cards are designed for college students, meaning they are designed with a college students’ lack of credit in mind and the rewards they earn are often geared toward college students.
Unsure which credit card is best for you? Have more questions?
Give Y2K Credit Solutions a call at (877) 552-1377.