Natasha Macmillan, Business Unit Director - Everyday Banking
Entering the world of credit cards as a student is an exciting milestone, but it also brings along important responsibilities.
While university or college years are filled with great experiences, it's also a time when financial decisions can have lasting effects. As a student, you have various recurring expenses like books, tuition, food, and transportation. Using a credit card for these expenses not only earns you cash back but also helps build good credit, which can be useful later in life for things like car leases or applying for a mortgage.
But, it's important to recognize that credit cards aren’t without risk. To help you navigate this new world we have put together a comprehensive guide to help you build smart credit habits and set you up for a stable financial future.
Common credit card mistakes to avoid
1. Making only the minimum payment
Paying only the minimum amount on your credit card bill might provide temporary relief, but it comes with a hefty price - interest. Interest is a set percentage that your credit card provider will charge for not paying off your bill in full each month. Accumulating interest over time can lead to unmanageable debt. Always aim to pay your credit card bill in full each month to avoid interest charges and help you establish a strong credit history.
2. Late bill payment
While there are many things to keep track of in college or university, overlooking bill due dates can have a big impact on your credit score. A history of on-time payments is essential for building a positive credit profile. You can avoid missing payments by setting up calendar reminders, or set up automatic payments. Just make sure you’ll always have enough money available. If not, you could overdraw your account, which will result in fees and a negative impact on your credit score.
3. Letting friends use your card
You might not think it’s a big deal to let your friend use your card in a pinch, but lending your credit card comes with risks. You are solely responsible for ensuring your bill is paid on time. Waiting on money owed from a friend when you have a large bill due can put a strain on any relationship and put your credit in jeopardy. The best policy is to make sure you're the only person using the card and encourage your friends to apply for their own credit cards.
4. Delayed reporting of a lost or stolen card
Discovering your credit card is lost or stolen can be stressful. Delaying reporting could open the door to unauthorized transactions. Reach out to your provider immediately to freeze your card and prevent potential credit damage.
5. Applying for multiple credit cards at one
Credit cards can offer enticing rewards and welcome offers, particularly on campus. However, it is important to be cautious when considering multiple credit cards. Applying for several cards can result in multiple hard credit inquiries, which might temporarily lower your credit score. It can also raise concerns with banks about your creditworthiness. Additionally, having multiple cards could increase the risk of missing bill payments and losing track of statements, allowing debt to pile up.
Balancing multiple cards requires careful attention to ensure bills are paid on time and credit utilization remains below 30%. Stick to one credit card for now and use it responsibly before considering adding another card to your wallet.
6. Overspending on your credit card
Your first credit card can give you a feeling of independence, and though you may begin with good intentions, it’s easy to succumb to temptation. This could be in the form of big impulse purchases like vacation tickets or electronics, or letting small charges add up forming an intimidating wall of debt. To make matters worse, most credit cards carry a double-digit interest rate, putting you at a disadvantage. Create a budget that aligns with your income, track your spending, and commit to paying your balance in full each month (use our downloadable student budget template). Having a strict spending limit will keep you from accruing debt and keep your credit utilization in check.
7. Applying for a credit card without doing research
Many banks try to entice students on campus by offering freebies and incentives. However, look beyond the free swag and make an informed decision by conducting your own research and comparing different cards. A good student credit card should have no annual fee, low interest rates, low credit limit, and rewards that complement your spending and lifestyle. Be sure to read the fine print to understand the terms of your agreement.
8. Taking out a cash advance
A cash advance gives you the opportunity to withdraw money from your credit card up to its limit. While it might seem like a good idea when you’re broke, it’s generally not a great decision. Cash advances come with a typical fee of 2-4%, plus their interest rate is generally higher and will kick in as soon as the money is taken out. While still less risky than a third-party payday loan, it still puts you on very shaky ground. Before making that choice, explore other options such as seeking help from family or finding a part-time job.
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The bottom line
Embarking on your credit card journey as a student is a significant step towards financial independence. By learning from common credit card mistakes and implementing some key tips, you are setting up the stage for financial success. Credit cards are a great way to build a strong credit history that can serve you well beyond your university or college years.