Managing Credit Wisely

When you graduate, you will leave your institution with two significant numbers. The first is your grade point average (GPA), which represents the level of academic success you attained while in college. The second, your credit score, is a numerical representation of your fiscal responsibility. Although this second number might be less familiar to you than the first, it could be a factor that determines whether you get your dream job, regardless of your GPA. In addition, twenty years from now you’re likely to have forgotten your GPA, while your credit score will be more important than ever.

Your credit score is derived from a credit report that contains information about accounts in your name. These accounts include credit cards, student loans, utility bills, cell phones, and car loans, to name a few. This credit score can determine whether or not you will qualify for a loan (car, home, student, etc.), what interest rates you will pay, how much your car insurance will cost, and your chances of being hired by some organizations. Even if none of these things is in your immediate future, now is the time to start thinking about your credit score.

Although using credit cards responsibly is a good way to build credit, acquiring a credit card has become much more difficult for college students. In May 2009, President Barack Obama signed legislation that prohibits college students under the age of twenty-one from obtaining a credit card unless they can prove that they are able to make the payments or unless the credit card application is cosigned by a parent or guardian.

Understanding Credit

Even if you can prove that you have the means to repay credit card debt, it is important for you to thoroughly understand how credit cards work and how they can both help and hurt you. Simply put, a credit card allows you to buy something now and pay for it later. Each month you will receive a statement listing all purchases you made using your credit card during the previous thirty days. The statement will request a payment toward your balance and will set a payment due date. Your payment options will vary: You can pay your entire balance, pay a specified amount of the balance, or pay only a minimum payment, which may be as low as $10.

But beware: If you make only a minimum payment, the remaining balance on your card will be charged a finance fee, or interest charge, causing your balance to increase before your next bill arrives even if you don’t make any more purchases. Paying the minimum payment is almost never a good strategy and can add years to your repayment time. In fact, if you continue to pay only $10 per month toward a $500 credit card balance, it will take you more than seven years to pay it off! Assuming an 18 percent interest rate, you’ll pay an extra $431 in interest, almost doubling the total amount you originally charged.

Avoid making late payments. Paying your bill even one day late can result in a finance charge of up to $30; it can also raise the interest rate not only on that card but also on any other credit accounts you have. If you decide to use a credit card to build credit, you might want to set up online, automatic payments to avoid incurring expensive late fees. Remember that the payment due date is the date that the payment should be received by the credit card lender, not the date that you send it.

If you decide to apply for a credit card while you’re in college, remember that it should be used to build credit and for emergencies. Credit cards should not be used to fund a lifestyle that you cannot otherwise afford or to buy wants. On the other hand, if you use your credit card just once a month and pay the balance as soon as the bill arrives, you will be on your way to a strong credit score in just a few years.

Debit Cards

Although you might wish to use a credit card for emergencies and to establish a good credit rating, you might also look into the possibility of applying for a debit card (also called a checkcard). The big advantage of a debit card is that you don’t always have to carry cash and thus don’t run the risk of losing it. Because the amount of your purchases will be limited to the funds in your bank account, a debit card is also a good form of constraint on your spending.

The only real disadvantage is that a debit card provides direct access to your checking account, so it’s very important to keep your card in a safe place and away from your personal identification number (PIN). The safest way to protect your account is to commit your PIN to memory. If you lose your debit card or credit card, notify your bank immediately.