Between schoolwork, extracurricular activities and social lives, we’ve got a lot onour minds. Right now, making it to that AM class is higher on our list of prioritiesthan how we’ll be paying for our first home years down the road (not that we don’talready have our dream homes planned out).
Thinking long-term now, however, really matters—especially when it comes tofinances. We know what you’re thinking: the importance of managing money is oldnews, and that’s why you spend wisely (most of the time) and most of all, stay far,far away from credit cards.
Turns out, now is the time to start building credit, and that means plastic.
Why is it important to start building credit—now?
You’re attached to your credit history your entire life, whether you like it or not.According to Brandon Farestad-Rittel, a college-savings expert for Kinoli Inc.,though it’s possible to correct past mistakes and improve your credit score, “ittakes years to repair a poor rating.” While you’re in college, you’re most likely not making large purchases, so it can be good to start using a credit card when you’renot spending a lot, meaning it’s more feasible to make your payments, which leadsto good credit.
In addition to ensuring a good credit history or offering yourself additional time torepair mistakes before good credit really matters (like when you’re buying a house),coming out of college without a credit history may be detrimental to your ability toborrow money, whether you’re buying a car or paying for grad school.
“Without any credit history, most reasonable lending options are inaccessible,”Farestad-Rittel explains.
Picking a credit card
With all the types of credit cards that are available today—rewards cards, in-storecards and more—how do we know what kind of credit card is the best fit for ourneeds?
Ask yourself what your spending habits are. Will you be putting all your purchases on your credit card, or only larger ones like plane tickets? If so, one with fewerrewards benefits may suffice, as many cards that provide rewards require a certainamount of spending or may charge annual fees. What does the majority of yourspending go towards: groceries? clothing? If there’s one area where you spend themost, choose a card that has points and rewards geared towards those spendinghabits. And what do you want your card to do for you? Some cards offer extendedwarranties (they’ll cover warranties for longer than vendors will, such as onlaptops) and others provide identity theft protection. Every credit card websiteoffers charts on what they do and don’t offer, and websites such as creditcards.comallow you to compare these charts side-by-side.
“Generally, credit cards issued by companies like MasterCard or VISA are preferable.They tend to have lower rates and offer additional rewards and benefits,” Farestad-Rittel says of cards issued by large, reputable companies over smaller, in-storecredit cards.
In-store cards, he says, typically have higher interest rates, and are beneficialonly when you’re using them on purchases you’d make anyway. So if you’re atraveler, a Delta Skymiles cardmight serve you well, or if you’re a frequent shopper at Victoria’s Secret, you might as well get the points forshopping—so long as you’re paying off the balance in full each month so you’re notoverwhelmed with interest.
When picking your plastic for the first time, Farestad-Rittel suggests starting withjust one credit card—especially if you’re opening a card on your own, because it’llbe easier to manage payments (it can be easy to forget how much you’ve spent onwhich card!) and avoid letting your debt get out of control.
Many credit card companies offer student accounts, such as the Discover StudentCard and the Chase Student MasterCard. These cards are designed to help students buildcredit and typically carry lower interest rates, lower late payment fees and noannual fee. Those with rewards have point systems based on purchases studentsalready make, such as books, dining, gas and entertainment.
“If you’re lucky enough to have parents paying for expenses, ask about becomingan authorized user on their account,” he says. “You’ll get a card in your name and aboost to your credit, but responsibility for the bill still falls on your parents.”
Have your parents call their credit card company to add you as an authorized user.If your parents are registered for an online account attached to their credit card,many companies allow you to add authorized users online. If you are opening yourown account, check your (snail) mail first, because many credit card companies sendpromotional offers through the mail—so what you once thought was solicitationcould really mean lower interest rates or cash back. In-store credit cards can beopened in store—any sales associate should be able to assist you.
Credit card companies don’t have your address? No problem. Once you’ve decidedwhat kind of card you want, each company’s website will have an online applicationyou can fill out, and you’ll receive a decision in minutes.
Knowing the fine print
Each credit card application comes with fine print, and it’s important to know thedetails of what you’re signing up for.
- Interest Rates:You will be charged interest when you don’t pay off the balance onyour card—each time you use your card, you are essentially borrowing money,and interest accrues when you don’t pay that money back. There are two types ofinterest rates: variable and fixed. Variable rates are based on the “prime rate,” a ratethe Federal Reserve charges banks for borrowing money. So as the Federal Reservecharges higher or lower interest rates to banks, your interest rate on your creditcard will change to reflect that. Fixed rates, on the other hand, are not tied to theprime rate, so the interest rate is much more constant, meaning you’ll have a betteridea of what you’ll be charged should you not pay off the balance on your card. Somecards may have introductory offers that provide low or zero-percent interest, so besure you know how long the offer lasts.
- Late-Payment Penalties:Will the credit card company charge fees with just onemissed payment, or is there a grace period? And do these fees increase with eachmissed payment? Make sure you know the penalties of late payments and comparethese consequences from card to card.
- Credit Limit:The credit limit on a card is how much you’re allowed to borrow—and this is usually based on a number of factors, such as your spending habits andyour annual income. They typically start out between $500-$1,000, but if you makepayments on time each month and pay off your balance in full, your credit limit willincrease. Be careful not to choose a card with too high of a credit limit to begin with—it’ll leave room for debt to go beyond control.
- Transaction Fees:Will you be charged for cash advances, such as when youwithdraw money from your credit card at an ATM? Exceeding the credit limit?Making international purchases? Transferring balances from one card to thenext? Make sure you know where your money’s going before you complete yourapplication and agree to the terms.
“Read all of the fine print,” Farestad-Rittel stresses. “It takes a little while, but it’syour money and reputation on the line.”
Especially if you’re a first-time credit card user, have your parents look over thecard information; chances are, they’ve learned all the ins and outs of credit cardcompanies and can help you decide between cards.
Maintaining a good credit score
The whole reason you signed up for a credit card was to build a good credit history—so make sure you maintain that goal! Spend responsibly, and so long as you’remaking the minimum payments, your credit score should remain in good standing.According to Farestad-Rittel, however, some lenders see a history of makingminimum payments alone as an added risk, so it’s better to pay off your balance infull each month. “It appears as though you were extended to the brink of your abilityto pay. Making minimum payments will also cost much more money in the long runas interest adds up quickly,” he says. Doing so, he adds, will also benefit your credit-to-debt ratio, which is how much debt you owe compared to how much availablecredit you have.
“If you have a card with a $2,000 limit and a balance of $1,000, the credit-to-debtratio is 50 percent. Making more than the minimum payment will reduce this ratioand lenders will see you as less of a credit risk,” he explains.
Though late payments or skipped payments are most damaging to your creditscore, there are other things that can downgrade your score as well. Applying fora large number of credit cards is a common problem—with each card, Farestad-Rittel explains, the issuer runs a credit inquiry that shows up on your report—andmultiple credit inquiries makes you look desperate for credit.
“Holding several low-limit credit cards is harmful as well,” he says. “It shows youalready have a hard time finding credit and are likely overextending yourselffinancially.”
Also, multiple applications can mean multiple denials, and numerous failed attemptsto obtain credit cards are red flags for lenders, he says. Multiple cards also lead tomultiple closures—which are damaging to your credit report as well.
“If you have one card with a high balance and close other cards with no balance,your credit-to-debt ratio can jump way up,” Farestad-Rittel says.
As @TrendyProblems once tweeted, “It’s all fun & games until you find yourself inmore debt than the U.S. Government”—so whip out that plastic, but spend wisely,and one of these days you’ll be able to finance your dream BMW.
SOURCES:
Brandon Farestad-Rittel, Kinoli Inc. College Savings Expert
http://www.e-wisdom.com/faq/credit-cards/fixed-apr-vs-variable-apr/
http://www.creditcards.com/credit-card-news/credit-card-comparison-fine-…
1282.php
http://www.learnvest.com/money-tuneup/credit-and-loans/how-to-choose-the-
best-credit-card-for-you/
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