cOLLEGE-TIME TO ESTABLISH CREDIT
Establishing Good Credit During College
by Howard Freedman
Copyright 2024 Financial Aid Consulting. All rights reserved. No portion of this article may be reproduced mechanically, electronically, by photocopying, or by any other means without expressed written permission of the author. Howard can be reached at finaidguy@gmail.com or 781-341-0234
All students and consumers must protect themselves from costly credit cards, especially if they are tempted to spend beyond their ability to pay. Though there is no doubt that a college education is one of the best investments money can buy, credit card management and how your credit is scored can profoundly impact a student’s employment, cost of borrowing, or just trying to get a positive start after graduation.
Regardless of the college attended, class rank, or major, a credit card score makes no distinction when tracking credit activity from the first credit purchase through the rest of your life. Unlike a degree earned by choice, a credit score and report are not. Therefore, students should be aware that it defines their credit and repayment history and other factors to determine their financial stability and the risk the lender will take. This, in turn, will be used to determine future interest rates, especially on major purchases requiring a home mortgage, new car loan, or other expenses they are likely to incur. Their credit report will also be used by employers, insurance agencies, and so on to evaluate their dependability, integrity, character, and other factors that impact a student’s career opportunities after college.
The good news is that credit cards are easy to obtain, especially for incoming college students. The bad news is that it is not so easy for students to be aware of what evil may lurks ahead if they are not in full control of managing both their budgets, the number of credit cards, and all that fine print on each credit card solicitation means. Credit card companies know what it takes to target or solicit students through programs tailored to their needs and spending habits. Enticements from gifts and promotions at student registration, credit cards with school logos to low-or-teaser rates, and so on are ways many credit card companies use to allure students to credit cards that may be prohibitively more expensive in the long term.
Although there is no simple answer to this ever-growing epidemic, I will simplify the fine print to help students to better understand what they need to do.
The Basics:
Interest Rates and Late Payments
Credit cards are only free if you pay your bills on time. That means a credit card company can charge a flat dollar late fee (usually $20 to $40 and more) and interest at a default rate (15 percent to 25 percent or more) going back to your first purchase date.
For example, a local store reduced a pair of designer jeans from $75 to $50. The student uses their credit card with a 0 percent teaser interest rate but does not pay their credit card bill on time. Consequently, the credit card company charges a $39 late fee and $10 interest, making the cost of those sale jeans $99 ($50 and $49 versus $50. Another person making the same purchase and paying their bill on time got a bargain and took a further step towards building a positive credit history.
Shopping For Credit Cards
Students needing credit cards would be best off establishing criteria for finding them on their own. I suggest that they compare each credit card in terms of several factors, including the teaser rate that won’t last long, the billing cycle, grace periods, late fees, how default interest rates are determined and calculated if you do not pay on time, methods of payments to pay online and associated fees, credit limits and increases. In this way, the student will be able to compare the best deal. It is also a process in which a parent should oversee based on their experience. Here are some Web sites that can provide further information:
www.bankrate.com and www.creditcard.com.
Credit Limits are the spending limits (the allowance) that can be spent on the credit card. Students without a budget tend to spend more than they can afford. The results are late fees, added interest, and a negative statement on their credit cards. They should also realize that they might only be able to use the card again once they pay their bill. That is why it is dangerous to spend up to the limit.
Assuming a student had a credit card limit of $500 that they reached the last day of the billing cycle, which was Sept. 2. The bill was received on Sept. 8 and due on Sept. 15. That means that the credit card was not available for use from Sept. 3 through Sept. 15 when it was paid. This is when students apply for another credit card, as this same scenario will only compound the problem and their credit score.
Billing Cycles and Payments
Billing cycles are the dates of the purchases made for the current credit card statement. Grace periods (from the billing statement to the payment due date) are when the payment should be made. These grace periods can be tight, especially for students trying to build a credit history. If the student has the money to pay, they should pay it on the line to prevent the uncertainty of the mail and when the payment was posted. If they do not have enough to pay the full bill, they should pay something to eliminate the late fee and a much higher default interest rate. Ignoring the bill will only make a bad problem much worse.
The Credit Report
Beyond a student’s degree is a credit score (the number) and a detailed credit report. This report is available to every consumer from these and other online Web sites.
• www.AnnualCreditReport.com
• www.myfico.com
• http://www.transunion.com
• www.equifax.com
• http://www.experian.com/
To determine creditworthiness, lenders use three primary service providers, Equifax, Experian, and Transunion. The scores using different criteria ranging from 300 (worst) to 850 (best) are used to market their cards, offer rates, and criteria for approval. Here are some of the criteria that determine the score.
• Payment History: Delinquencies, defaults, and collections
• The amount owed on credit cards and other debts
• Number of recently opened credit card accounts
• Types of credit the consumer uses
• Late payments usually stay on your record for seven years
• 30-day delinquency normally affects your credit for one year
My Top 10 List for Credit Card Management
1. Ignore free and pre-approved credit card solicitations that may be costlier than you think.
2. Establish a school budget based on necessities and avoid nice-to-haves.
3. Limit the number of credit cards to two at the most. Be sure to know when the bills are due and the credit limits. Don’t apply for more credit cards than you need.
4. Comparison shop for cards based on the information in this article. Look for the best credit card deals. www.creditcard.com and www.bankrate.com
5. Never take cash advances from credit card companies. The fees will be more expensive than you think.
6. If you use a credit card, make a small purchase and pay it off quickly to establish a high credit score.
7. Establish a payment calendar for ongoing and credit card bills. Pay your bills online to avoid mailing delays expensive late fees, and interest.
8. Look for ways to reduce expenses when possible. Seek side jobs such as babysitting to pay off credit card debt.
9. Only accept store credit cards with discounts but favorable rates and payment terms.
10. Always check your credit card scores at least annually to review and correct your activity.
Borrowing and the use of credit is an integral part of our economy. It is a reality that goes hand in hand with formal education and planning for the future. Learn as much as you can about credit by reading and understanding what needs to be done, along with other resources such as in your high school and other organizations that can help you.
We should all be grateful for our opportunities and the many things we can buy but also be less impulsive to buy the many things we do not need. Think and plan for a better future with a good education, great credit, and unlimited opportunities.