Some common financial goals for college graduates include buying a car or a house, but how does that process work? Taking out a loan is required for most people to make these large purchases, and good credit is essential to receiving the best terms on the loan. Establishing and building your credit in college is a great start towards these financial goals, but not only these. Banks, landlords, and insurance companies may all look at your credit to determine your financial responsibility.
The two ways of establishing credit are installment credit like loans, and revolving credit which is a credit card. Now, most college students I know are not taking loans from their bank, but a significant portion have credit cards to help build their credit. As we switch mainly to online shopping due to COVID-19, credit card use is on the rise, and as a result, the risk for debt is growing too. The average American’s credit card debt is already $6,194 but that could increase with the prevalence of online shopping (USA Today). Credit cards are easy to use but can result in you spending more money and racking up tons of debt, which affects your credit score and impacts many facets of your financial life.
A credit card purchase is essentially a short-term loan and allows people to purchase items with money from the credit card company, and they pay it back at the end of the month. The ease of swiping a card can actually cause people to spend more money though. According to a study by Dun & Bradstreet, people spend 12-18% more on purchases with a credit card than with cash. Combine this with the ability to create large amounts of debt and you’re in dangerous territory. The annual percentage rate (APR) that will be charged on unpaid balances on a card usually ranges from 15%-22%, with students without a co-signer ranging toward the higher percentage. A 22% rate means that for every $100 unpaid on a credit card, after a year you will owe $22 of interest. The $122 will compound on itself and result in crippling debt if left unpaid. This debt can impact your ability to receive mortgages, car loans, and maybe even sign a lease.
My warnings are not meant to scare you away from credit cards. Building credit in college with a card is not a bad idea! You should just be careful of how you utilize the card because poor management could impact your goals. When you apply for a loan at a bank, they will look at your credit score and credit report. The credit score is the “Financial GPA”, like your GPA in school. It is essentially a score that rates how responsible individuals are with borrowed money. We refer to the credit report as the “Financial Transcript”. It details all the credit transactions individuals have made, including student loans and credit card use (you can view a free credit score estimate here: www.creditkarma.com).
Any debt and untimely payments will impact your score and appear on your credit report. The bank will look at these and determine your ability to pay back a loan, with a lower score resulting in higher interest rates or a denied loan application. However, paying the full balance on your bill on time, and not using more than 30% of your credit limit can earn you a lower interest rate and help you achieve your goals.
I have four tips I would like to share to make credit card use simple. These will give you a foundation to build healthy credit while in college.
- Pay on Time – Make sure you pay the bill on time and at least the minimum payment. Paying the entire bill will help you stay away from unnecessary debt but paying at least the minimum will keep your score intact.
- Regular Payments – Pay your credit card balance once a week and make it a routine. Utilizing more than 30% of your credit limit can reflect poorly on your score, so this method will help you avoid harming your score by preventing large balances. (I pay mine off every Wednesday.)
- Specified Purchases – Only use it for specific purchases like gas or groceries. Contrary to popular belief, more is not always better. Do not put every purchase on your credit card and expect it to end well (I have made this mistake before)!
- Spend YOUR Money – Try to visualize a credit card as another debit card. Do not spend money that is not in your bank account!
Responsible credit card use will result in a good credit score and financial freedom, but poor use can result in massive amounts of debt, a poor score, and the inability to achieve your goals.
Powercat Financial has an entire section on our website dedicated to credit (https://www.k-state.edu/powercatfinancial/credit/) that covers credit scores, reports, what impacts them, and many other credit topics.
If you have questions that you cannot find on the credit section of our Powercat Financial website, we would love for you to schedule a free appointment via the link on our homepage at www.k-state.edu/powercatfinancial.
References:
https://www.nerdwallet.com/article/credit-cards/credit-cards-make-you-spend-more
Cal Shimkus
Peer Financial Counselor I
Powercat Financial
powercatfinancial@ksu.edu
www.k-state.edu/powercatfinancial
