You’re away from home, and you have a credit card. Could life get any better?
It might seem like a dream come true right now, but it can quickly turn into a nightmare if you use your credit card the wrong way. Let’s take a look at the top-five mistakes college students make so that you can avoid every single one of them.
Mistake No. 1: You Don’t Think Credit Is Important.
While you’re at college, it’s easy to forget that there’s a real-world adventure you have to go on at the end of your four years. And in that real world, credit matters a lot.
You might hear that it doesn’t, but ignore that advice. If you can handle credit responsibly, you’ll set yourself up for a lot of opportunities that will save you money over your lifetime.
People with excellent credit get the best interest rates on mortgages, and this alone saves you thousands of dollars. You’ll also get lower premiums on car insurance as well as the best offers for rewards credit cards.
Building good credit now also helps you when you’re close to graduation. In your senior year, you’ll be sending out resumes. Your potential employer might decide to look at your credit report. If you have a credit report that shows you’ve handled credit responsibly, you’ll be more highly regarded.
[Read: The Best Student Credit Cards of 2018.]
Many college grads also need to rent an apartment. You might still have to pay a deposit, but the amount will be lower if you’re considered creditworthy. Excellent credit can help you now as well as in the future.
Mistake No. 2: You Shrug Off a Late Payment.
When it comes to credit cards, no shrugging is allowed. Ever.
I already mentioned that potential employers might look at your credit report. Since you’re young, there won’t be a whole lot of information listed, so a negative item like a late payment or a default is going to stick out.
And you want to know how long that negative item will stay there? A whopping seven years, even if you make the account current. If you keep ignoring the late payment, after 120 days or so, your issuer might sell your account to a collection agency.
If that happens, you’ll see both the late payment and the defaulted account on your credit report. Two negative items plus a short credit history equal a really bad credit score.
So, take a late payment very seriously from the start. How to avoid it in the first place? Sometimes, a late payment happens because you’re making the next mistake.
Mistake No. 3: You Don’t Know What You Spent (or Where You Spent It).
This is the mistake that not only messes up your credit score but also gets you into credit card debt. You do not want to leave college with credit card debt. You might already have student loan debt hanging over your head, so don’t make matters worse.
If you do use a credit card, set up a budget and track your spending. There’s a vast amount of free online help for this. You can use money management websites, such as Mint. Most of the major websites also have phone apps, if that’s your preference.
[Read: These 10 Schools Give Students the Best Value.]
Don’t use your new credit card until you have a budget and a tracking system in place.
Mistake No. 4: You Don’t Understand That Compound Interest Is Evil.
According to a Sallie Mae survey in 2016, 63 percent of college students paid off their credit card bills every month, which is terrific. However, 25 percent worried about their credit card debt.
I’ve heard from many young adults who ended up in debt because they didn’t realize that compound interest would make their debt grow so fast.
Well, to be fair, I’ve also heard from older folks who had never learned this. So now’s the time to get a grip on the devilish ways of compound interest.
Here’s an example: Let’s say you have a $5,000 balance on a credit card that has a 20 percent annual percentage rate. The minimum payment on this debt is $133.33.
Now, you might think that amount isn’t so bad. But if you only make the minimum payment, it will take you 277 months to get rid of your debt.
That’s a little over 23 years! You end up paying $7,732.49 in interest on your original $5,000 balance. Here’s your total cost for those purchases you didn’t pay off promptly: $12,732.49.
Think about what a waste of money that is. If you do get in over your head at some point, pay more than the minimum. Don’t relax until your balance is zero again.
Mistake No. 5: You Don’t Understand the Connection Between Your Credit Cards and Your Credit Score.
You have a credit utilization ratio, which is the amount of credit you have used compared with the amount of credit you have available. Simply put, if you keep high balances on your credit cards, your score will go down.
Your credit utilization accounts for 30 percent of your FICO score. If you have a $1,000 credit limit, don’t use the card to purchase more than $300 during the month. This gives you a 30 percent ratio (300/1,000), which is acceptable. The lower the ratio, the better.
Another important connection is your payment history. This accounts for 35 percent of your FICO score. Remember Mistake No. 2? If you make late payments or, heaven forbid, let your account slide into default, this wreaks havoc with your score.
I’ve already mentioned that it takes seven years for a late payment or a collections account to fall off your credit report. Don’t let this happen to you.
What Happens If You Make a Mistake?
Sometimes, life gets hectic and you might slip up on a payment or realize you went over your budget. With credit-related mishaps, it’s always best to jump on it as quickly as you can.
If it’s something like a late payment, call your issuer and explain what happened. A good excuse is something like, “I had the flu during final exams , and the payment slipped through the cracks.”
[Read: The Best Starter Cards for Building Your Credit.]
But you must tell the truth, and if you don’t have a good excuse, make the call anyway and plead your case as a young student who is learning credit. Ask for a little forgiveness if this is your first credit card faux pas.
If you’ve maxed out your credit card, stop using it until the balance is paid off. Your credit score will start to go up as your balance starts going down. Then, reconsider your choice to use a credit card. Maybe you’re not quite ready for the responsibility.
Being at college is a wonderful time that can set the stage for a successful financial life. This will be even easier if you choose the right college.
If you’re just now applying to college or thinking about making a change, check out the U.S. News 2019 Best Colleges rankings.
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5 Mistakes College Students Make With Credit Cards originally appeared on usnews.com
