When you were dreaming about being in college, attending via Zoom was probably not what you had in mind.
I know it must be frustrating, but the current state of affairs will come to an end at some point. In the meantime, you can make the best of your extended stay at home by using the time to learn how credit cards work.
If you think about it, getting to know credit cards while your parents are there to answer all of your questions is kind of ideal. Let me be clear, though. You might not be ready for a credit card in your own name at the start of your freshman year.
But if you had a few years of college under your belt before the pandemic closed down your campus, you could be ready for the responsibility, especially if you’ve been an authorized user on your parents’ credit card.
It’s essential that you use cards responsibly. If you don’t, you could end up in credit card debt.
There are a lot of mistakes that people routinely make with credit cards. Here are the five that college students most often make. Read on so you can learn to avoid every one of them.
Mistake No. 1: You Don’t Think Credit Is Important
While you’re in college, it’s easy to forget that there’s a real-world adventure you have to go on at the end of your four years. And in that real world, credit matters a lot.
You might hear that it doesn’t, but ignore that advice. If you can handle credit responsibly, you’ll set yourself up for a lot of opportunities that will save you money over your lifetime.
People with excellent credit get the best interest rates on mortgages, and this alone saves you thousands of dollars. You’ll also get lower premiums on car insurance as well as the best offers for rewards credit cards.
Building good credit now also helps you when you’re close to graduation. In your senior year, you’ll be sending out resumes. Your potential employer might decide to look at your credit report. If you have a credit report that shows you’ve handled credit responsibly, you’ll be more highly regarded.
[Read: Best Student Credit Cards.]
Many college grads also need to rent an apartment. You might still have to pay a deposit, but the amount will be lower if you’re considered creditworthy. Excellent credit can help you now as well as in the future.
Mistake No. 2: You Shrug Off a Late Payment
When it comes to credit cards, no shrugging is allowed. Ever.
I already mentioned that potential employers might look at your credit report. Since you’re young, there won’t be a whole lot of information listed, so a negative item like a late payment or a default is going to stick out.
And you want to know how long that negative item will stay there? A whopping seven years, even if you make the account current. If you keep ignoring the late payment, after 120 days or so, your issuer might sell your account to a collection agency.
If that happens, you’ll see both the late payment and the defaulted account on your credit report. Two negative items plus a short credit history equal a really bad credit score.
So, take a late payment seriously from the start. How to avoid it in the first place? Sometimes, a late payment happens because you’re making the next mistake.
Mistake No. 3: You Don’t Know What You Spent (or Where You Spent It)
This is the mistake that not only messes up your credit score but also can get you into credit card debt. You do not want to leave college with credit card debt. You might already have student loan debt hanging over your head, so don’t make money matters worse.
If you do use a credit card, set up a budget and track your spending. There’s a vast amount of free online help for this. You can use money management websites, such as Mint. Most of the major websites also have phone apps, if that’s your preference.
[Read: Best Secured Credit Cards.]
Don’t use your new credit card until you have a budget and a tracking system in place.
Mistake No. 4: You Don’t Understand That Compound Interest Is Evil
According to a 2019 Majoring in Money survey by Sallie Mae, 60% of college students paid off their credit card bills every month. That’s terrific, of course, but that percent is slightly down from 63% in 2016.
I’ve heard from many young adults who ended up in debt because they didn’t realize that compound interest would make their debt grow so fast.
Well, to be fair, I’ve also heard from older folks who had never learned this. So now’s the time to get a grip on the devilish ways of compound interest.
Here’s an example: Let’s say you have a $5,000 balance on a credit card that has a 20% annual percentage rate. If you decide to pay $150 per month, it will take you 50 months to pay it off. You’ll end up paying $2,359.09 in interest. Your $5,000 balance ends up costing you a total of $7,359.09.
Think about what a waste of money that is. If you do get in over your head at some point, pay more than the minimum. Don’t relax until your balance is zero again.
Mistake No. 5: You Don’t Understand the Connection Between Your Credit Cards and Your Credit Score
You have a credit utilization ratio, which is the amount of credit you have used compared with the amount of credit you have available. Simply put, if you keep high balances on your credit cards, your score will go down.
Your credit utilization accounts for 30% of your FICO score. If you have a $1,000 credit limit, don’t use the card to purchase more than $300 during the month. This gives you a 30% ratio (300/1,000), which is acceptable. But if you’re working on increasing your credit score, then keep it less than 10%.
Another important connection is your payment history. This accounts for 35% of your FICO score. Remember Mistake No. 2? If you make late payments or, heaven forbid, let your account slide into default, this wreaks havoc with your score. It takes seven years for a late payment or a collections account to fall off your credit report. Don’t let this happen to you.
What Happens If You Make a Mistake?
Sometimes, life gets hectic , and you might slip up on a payment or realize you went over your budget. With credit-related mishaps, it’s always best to jump on it as quickly as you can.
If it’s something like a late payment, call your issuer and explain what happened. A good excuse is something like, “I had the flu during final exams, and the payment slipped through the cracks.”
[Read: Best Starter Credit Cards.]
But you must tell the truth, and if you don’t have a good excuse, make the call anyway and plead your case as a young student who is learning credit. Ask for a little forgiveness if this is your first credit card faux pas.
Average Credit Card Debt for College Students
I talk a lot about the importance of using credit responsibly. The reason is that credit card debt is painful for anyone, but it’s especially troublesome when you’re still in college because you’re most likely to already have student loan debt.
The average credit card debt for students in 2019 was $1,423, a 32% increase over the average balance in 2016 of $1,076, according to the Sallie Mae report. If you’ve maxed out your credit card, stop using it until the balance is paid off.
Your credit score will start to go up as your balance starts going down. Then reconsider your choice to use a credit card. Maybe you’re not quite ready for the responsibility.
College is a wonderful time that can set the stage for a successful financial life. This will be even easier if you choose the right college. If you’re just now applying to college or thinking about making a change, check out the U.S. News 2021 Best Colleges rankings.