Building good credit in college is one of the best financial moves students can make. Having good credit allows them to qualify for loans, rental applications, auto insurance, phone plans and can help them get a job.
Being responsible with credit is the best way to establish and improve a credit score. For college students without much credit history, there are small but important steps they can take to build up their score.
Obtaining a Student Credit Card
Some credit cards are marketed to students and others who don’t have much borrowing history. Federal laws restrict issuing credit cards to anyone under 21 unless the applicant has the independent ability to repay debt or has an adult co-signer who accepts joint liability for the account.
Student credit cards may have low credit limits, such as $1,000, but they are otherwise indistinguishable from other credit cards. They may even have features such as cash back, no annual fees and budget management tools.
Using Credit Cards Wisely
After getting a credit card, students can start using it slowly and for occasional, small purchases that can be paid for on time. This will help build credit history and help them stay out of debt.
Students shouldn’t let a new card sit in their wallet. They must use it or risk the bank closing it due to inactivity. Putting small, recurring charges on it, such as a Netflix account or other website subscription, is an easy way to maintain use at a low cost.
Students shouldn’t make any big purchases unless it’s an emergency. Having low debt levels on their credit card will allow them to have enough of a credit line available in an emergency, and will increase the credit utilization part of their credit score.
Building Credit With Student Loans
One of the last things college students want is to default on their student loans, as this affects credit.
Borrowers should make at least the minimum payment each month and do it on time. They should borrow only what they need to go to school, instead of using the funds to buy a car or dine out. Once they graduate, they may want to consolidate their student loans to get a better interest rate.
On-time payments and paying off student loans will improve the credit score over time. If students run into problems making payments, they should contact their student loan provider and ask for forbearance. Federal student loans also offer Income-Driven Repayment plans that base payments on a borrower’s income.
Opening mail from your credit card company is never fun. If it isn’t a bill or marketing letter, it’s often an update to the terms of the credit card agreement, including changes to the annual percentage rate, or APR, that determines the interest rate paid on revolving balances.
Credit card interest rates are tied to the benchmark rate set by the Federal Reserve, so if you’re paying attention to what the Fed does then you might get an idea of upcoming increases. Or if you wait to receive a letter from your credit card company, the notification will usually come 45 days in advance, giving you at least one billing cycle to pay down your balance or find a better credit card.
When You Won’t Be Notified
However, you may not get such explicit notice if you incur a penalty APR for missing payments. The APR increase is immediate and is explained in the terms and conditions you originally received with the card. The contract will also list how you can get back to the original interest rate. Promotional rates are for a fixed period and you likely won’t get notified of when they’ll end.
If your APR is variable and tied to interest rates set by the Fed, then you may also not be notified early. Your credit card company may notify you anyway, but it isn’t required.
What to do About a Rate Hike
If you receive a credit card rate increase notice, your best solution is to ask the bank to lower your rate. It just takes a phone call and can often get you a reduction if you have good credit history and always make payments on time. You can also shop around for a better credit card elsewhere—be sure to let your bank know of better offers that it should at least match.
If you have a large balance, a balance transfer card can help you avoid the higher interest rate that’s coming soon. Balance transfer cards often offer 0-percent interest for a year or so, giving you time to pay it off before having to pay interest.
The best solution is to pay your credit card balance in full each month to avoid paying interest. Not carrying a balance is one of the best things you can do to raise your credit score.
Credit card rewards can be a free way to travel and get cash back for your daily expenses.
But if you’re not paying your credit card bill in full when it arrives, then you’re paying interest and those free rewards are no longer free. That’s not a surprising fact, but it’s a top one to keep in mind when considering these four surprising facts about credit card rewards:
A 1% reward
Don’t expect to receive nearly in much in rewards points as you do in spending to get them. The typical reward point is worth about 1 percent of what you paid to earn it when you cash it in for airline miles, hotel room, cash back or any other reward.
The lender expects that you won’t pay the monthly bill in full, and possibly late, meaning you’ll pay interest charges and late fees. That can make rewards points more costly.
Remember the annual fee
Rewards cards with annual fees usually offer better rewards than cards without them. But the fees can require you to spend a lot of money to make the rewards worthwhile.
If the average rewards point is worth 1 cent, you’d have to spend $9,500 annually, or $791 per month, to offset a $95 annual fee.
Annual fees can be worthwhile in other ways. A rewards credit card can offer rewards such as upgrades on flights and rooms, airport lounge access, and free luggage check-in. New cardholders may have the fee waived in the first year as an enticement to join.
Look on your credit card’s website or in the agreement it mailed you, and somewhere in the fine print you’ll find details on when your rewards points expire. From 12-24 months is likely, though some may let you buy back points after they expire.
Points drop in value
If you don’t redeem points regularly, you could see them drop in value as airline frequent flier programs and other programs change their redemption requirements.
You’ll likely get advance notice from the credit card company before any program changes are made. With a few months’ notice, you should have some time to redeem your points earlier than planned and get the most out of them.
As with any financial product you pay for, be sure to read the fine print in the long, boring contract you get in the mail when the credit card is sent to you. It should explain in detail how its rewards points work.
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