If you are a student or heading off to college soon, you will likely want to get a credit card or might even have one to pay for your expenses.
You might feel that credit cards are great for situations when you are out of cash but wish to purchase a commodity or cater to a financial emergency.
While it is great to enjoy the benefit of having access to money that you do not own and get a head start on building your credit early, you must handle credit cards with caution and vigilance.
Tips To Ensure Responsibility From Students When Using Credit Cards
By no means are credit cards an evil source of acquiring cash. However, the last thing you would want is the combination of adult freedom and borrowed capital to shove you into a vicious debt spiral at a growing age.
To ensure judicious use of credit cards, follow these seven tips –
1. Borrow What You Can Repay Fully Each Month
While this tip might sound like a no-brainer, this is where most people slip and get plunged into debt. Every student obtains a credit card intending to pay it off monthly.
However, this plan can often get derailed with an unexpected break trip with your buddies or a massive sale at your favorite clothing store.
It is imperative for you to not put more purchases on your credit cards than what you can sensibly repay with your discretionary spending money. Pre-plan for trips, put money aside for that big sale, or any other expenditure to ensure that you do not overspend.
Respect any spending limitations imposed by your parents if they are the ones paying for your credit card bills. Spending more than the limit regularly might lead to your parents losing trust in you and cutting off paying for your expenses.
2. Start With A Single Credit Card
While the idea of applying for several credit cards at once might sound tempting, doing so can be decimating to your credit score. You will receive a new credit penalty every time you apply for a new account, specifically if you have a brief credit history.
Remember: the length of your credit history is a dominant criterion when calculating your credit score. Consider keeping your first credit card operating as long as you can to prolong your average credit account.
Therefore, it is advisable to use your first credit card for a year or more before considering applying for another.
3. Minimise Your Credit Utilisation
Having a high limit on your credit card does not mean that you should never hesitate to reach it each month. On the other hand, if you reduce your credit limit, your borrowing ratio will automatically increase, negatively impacting your credit score.
Credit utilisation ranks as the second most important factor when calculating your credit score, and it is advisable to keep it below 30% at all times.
This step will ensure that you spend up to a reasonable standard and your credit score advances towards improvement with low spending and timely repayments.
4. Prioritise Responsible Utilisation, Not Rewards
Your credit card might offer cash or travel rewards which might be alluring if you have some significant expenditures planned. However, do not overspend or max out your card every month to receive more rewards.
Considering that you have recently started using a credit card, there will be a plethora of time for rewards-hacking. Being a student, you must emphasise using your credit card judiciously and spend realistically.
Showing responsibility towards your credit card expenses and making timely reimbursements will go a long way in gaining financial stability and thus a secure future.
5. Avoid Late Payments
We already spoke about only borrowing what you can repay in full at the end of each month. But it is also hugely imperative that you never skip timely repayments.
Your payment history is the leading factor in determining your credit score, which is why making timely repayments is paramount.
If you are forgetful, set reminders on your smartphone and email account, note it in your planner or start using an automatic payment to pay the outstanding balance in full on the final date.
6. Get The Right Credit Card
When getting a credit card from a bank, you must remember that not all credit cards are alike, as every card offers different benefits or trade-offs.
Do your homework before submitting your credit card application to decide on a card that offers the most benefits. Some typical benefits include a lower interest rate, reasonable credit limits, no annual fees, and transparent billing policies.
If you believe that you might carry some balance every month, opt for a low-interest credit card. A reward credit card might be enticing; however, the higher Annual Percentage Rate (APR) and a higher annual fee will not be worth it.
7. Get Your Own Credit Card
If you can produce proof of income, consider applying for a credit card in your name. Being free from having your parents pay for your bills or ridding yourself of a co-signer will make you more responsible towards making timely payments and spending less.
This process might be a tricky one because many financial firms no longer offer student credit cards, and some require you to produce several documents before they decide to register a card in your name.
This step is the only way to start earning rewards in your name and begin accumulating good credit over time. Besides adding responsibilities, having your own credit card gives you higher purchasing power as well.
If you are a student and wish to keep your credit healthy, minimise debt, or keep it nonexistent, consider following the practices mentioned above and adopt responsible credit card habits.
When you use your credit card this semester, spend what you can afford to repay if you have the card in your name.
Do not opt for multiple credit cards for at least a year, maintain a credit utilization ratio below 30%, emphasise responsible credit habits before pursuing rewards, and be sure to make all of your payments on time.