A Credit Success Guide for College Students
posted
January 21, 2025
in
Credit & Debt
Helping Your Freshman Master Credit: A Guide to Building Strong Financial Habits
Sending your child off to college is a major milestone. While you’re busy thinking about packing lists, course schedules, and student loans, there’s another crucial topic that deserves your attention: credit utilization. Teaching your freshman how to manage credit responsibly can be an invaluable skill that sets them up for long-term financial success.
What Is Credit and Why Does It Matter?
Before diving into credit management, it’s important to understand what credit is and why it matters. Credit is essentially borrowed money that is repaid with interest. It comes in various forms, including credit cards, student loans, and car loans. But credit isn’t just for making purchases, it’s also a tool for achieving important goals, such as renting an apartment, buying a car, or even landing a job.
Building good credit takes time and discipline, which is why many college students struggle. Often, it’s because they don’t fully understand how credit works, but with some guidance, they can avoid common mistakes.
Starting Strong: The First Credit Card
For most students, their first experience with credit comes through a credit card. While this can be exciting, it also requires careful handling. The best approach is to start with a low-limit credit card, ideally one with no annual fee, and use it sparingly.
Using a credit card responsibly is a great way to build credit without taking on too much risk. Encourage your freshman to keep their credit utilization low, ideally under 30% of their credit limit, and pay off the balance in full each month to avoid interest charges and establish a positive credit history.
A simple rule of thumb is to treat the credit card like a debit card, only charge what can be paid off in full when the bill arrives. For example, if your student buys textbooks, they should ensure they can pay off the balance when due. This helps avoid interest charges and creates a solid credit history. On the other hand, missed payments can result in late fees and harm their credit score. Remind them that credit card companies report payment history to the three major credit bureaus, and a missed payment can remain on their report for up to seven years.
The Dangers of Overspending
One of the most common mistakes students make is overspending. It’s easy to swipe a card without thinking about the consequences, especially when surrounded by the temptations of college life. However, credit isn’t free money and balances can add up quickly.
For instance, if your student racks up $300 on a credit card buying clothes and eating out, and only makes the minimum payment, the interest on that balance (with an average credit card rate of around 20%) can turn that $300 debt into $400 or more over time. This extra cost comes from interest, which is charged on any unpaid balance.
To help avoid this scenario, set some ground rules. Perhaps they should only use their credit card for essentials like groceries or gas. Additionally, encouraging the use of a budgeting app to track spending can help them stay within their means and avoid unpleasant surprises when the bill arrives.
Building Good Credit Habits Early
Credit isn’t just about avoiding mistakes, it’s also about building healthy financial habits. Encourage your student to check their credit report at least once a year. They can do this for free at AnnualCreditReport.com, which provides access to their reports from the three major credit bureaus: Equifax, Experian, and TransUnion. Regularly reviewing their report helps them stay on top of their credit status, catch errors, and spot signs of identity theft early.
Another helpful habit is setting up automatic payments for their credit card bills. Most credit card companies offer this feature, ensuring bills are paid on time every month. Since payment history is the most significant factor in determining a credit score (accounting for 35%), this practice helps maintain a strong score by avoiding late payments.
What to Do When Things Go Wrong
As your freshman navigates the world of credit, remind them that the habits they form now will follow them into adulthood. A good credit score can help them secure lower interest rates on loans, qualify for apartment leases, and even land a job. It’s worth the effort to build and maintain good credit from the start.
That said, mistakes are inevitable, especially for those new to managing credit. If your student overspends or misses a payment, encourage them to act quickly. The sooner they pay down any balances and get back on track, the better it will be for their credit score in the long run.