Often credit cards can be daunting for college students because we have heard all the stories about massive amounts of debt stemming from mismanagement of credit cards. Although you can put yourself in bad situations by misusing a credit card, it may not be as complicated as you think to responsibly use a credit card to begin building a credit score.
What is Credit?
Credit is the trust which allows one party to provide money or resources to another party wherein the second party does not reimburse the first party immediately but promises either to repay or return those resources at a later date. In terms of credit cards, this is the trust that the credit card companies have that allows you to make purchases with their money that you would pay back to them at the end of the month, or over time.
The reputation that you build through borrowing money and paying it back forms your credit score and credit report. These two reflections of your credit reputation often are used interchangeably but are actually very different. A credit score is a number that reflects an individual’s creditworthiness based on their credit files, while your credit report is a detailed list of all your credit transaction within the past 7 years. In college terms, your credit score would represent your credit GPA while your credit report would represent your credit transcript. Although no one knows the exact formula that is used to determine your credit score, we do have a good idea of the different weighting they use when determining your credit score.
- Payment History (35%): Payment history is the biggest factor when determining your credit score at 35%. This is simply whether or not you pay on time the amount owed.
- Utilization (30%): Utilization is the second biggest factor in determining your credit score at 30% and represents how much of your available credit (credit limit) you are using each month. As a general benchmark, try to avoid using more than 30% of your credit limit each month to satisfy responsible utilization. For example, if I had a credit limit on my credit card of $1,000, I would try to avoid spending more than $300 with that card.
- Length of History (15%): Length of history represents the length of your credit history, with longer relationships with creditors being viewed favorably. For this reason, it is a good idea for college students to get a credit card and start using it for routine expenses such as gas or groceries to begin building up their credit history, keeping that credit account open for a long period of time.
- Shopping for Credit (10%): This portion rates how often you are opening new account or applying for different credit cards. The more often you open new accounts and apply for credit, the more poorly this area will be reflected in your credit score.
- Mix of Credit (10%): Mix of credit is based on the kinds of credit you have with a mix of cards and loans being preferred. Credit cards would be considered revolving credit while a mortgage would be considered installment credit because it is a contract to repay the loan over time.
Why is it important?
Credit becomes important for various reasons. Your creditworthiness (credit report and credit score) will determine the interest rates which you will receive on loans. These loans can be a mortgage to buy a house, a car loan, etc. Having good credit as opposed to bad credit causes lenders to have more confidence in your ability to pay the debt back in full and on time, causing them to offer lower interest rates due to the lower risk they are taking. Your credit worthiness can also even affect your ability to get a job, especially in the financial industry. As your credit worthiness one measure of your responsibility with money, having bad credit may cause an employer to second guess your ability to manage money within their company. Another way your creditworthiness can impact your life is your ability to rent from a landlord. While applying for an apartment, duplex, condo, etc. the landlord often checks your creditworthiness so that he is confident in your ability to keep up with rent payments.
Tips for Credit Use in College
Now that we have established what credit is and why it is important, let’s talk about some responsible ways that you can start building credit in college. The first step to building credit is getting a credit card. As there are many different credit cards, it can be a daunting task to select the one that is best for you. A site like www.nerdwallet.com is a great place to start as they have a great credit card comparison page that allows you to compare hundreds of different cards so that you can find the best one for your specific spending needs.
Now that you have selected your credit card, it is time to start building up your credit. First look at your credit card limit and determine the recommended utilization for your card. The benchmark for over utilization is around 30%, so avoiding spending over 30% of your card limit will assure you are not receiving negative utilization on your credit report. Some of the items that would be great to purchase with your credit card are purchases that you must make each month that you are 100% certain that you can pay off at the end of the month such as gas and groceries. Another good tip is to set up automatic payments so that you do not forget to pay your credit card bill every month. Automatic payments are set up by linking your bank account to your lender’s website so that instead of having to write a check or pay the bill manually, it will just take it directly out of your bank account.
For more tips and tricks on how to responsibly start building you credit or any questions you have on credit please visit Powercat financial so that a peer counselor can help you!
Anytime you want help with student loans, job offers, budgeting or have additional questions about other financial topics, remember Powercat Financial is available for Zoom or in-person financial counseling sessions. They may be requested via our website link at www.k-state.edu/powercatfinancial.
We also have walk-in days on the first Friday of every month where students can simply walk-in without an appointment to ask a quick money question and get a free pop. Our next Pop Up to Powercat Financial day will be December 3rd.
Do not miss our other upcoming event:
Money Management for All – a financial workshop sponsored by SGA Student Governing Association with Powercat Financial on Tuesday July 16th in Union Big 12 room at 5:30pm!
Alex Miller
Peer Counselor II
Powercat Financial
302 K-State Student Union, Third Floor
918 N. 17th Street
Manhattan, KS 66506-2800
785.532.2889
www.k-state.edu/powercatfinancial
PowercatFinancial@k-state.edu
