College is a time when many students get their first credit card. Students entering college are usually 18, so they are able to legally sign for a credit card for the first time. Credit card companies visit campuses in hopes of obtaining lifelong customers. Although signing up for a credit card can be a good first step in building a history of responsible credit, it is advisable to use caution when using credit cards.
Understand Your Credit Score
As soon as you apply for your first credit card, it is reported to the three major U.S. credit bureaus (Equifax, Experian and TransUnion). Creditors report your credit limit (the amount of credit available to you), how much you borrow and how responsible you are about paying your debts. These factors determine your credit score.
Thirty-five percent of your score is made up of your payment history. On-time payments raise this component while late payments and bankruptcies lower it. Thirty percent of your score is made up of your debt-to-credit ratio. It is best to keep your credit use to 30 percent or less of your available credit line. Fifteen percent of your score is based on the average age of your accounts. Opening an account in college and being responsible about using it can raise this score. Ten percent of your score is based on the types of credit you use, and the final 10 percent is made up of inquiries. Each time you open a new credit account, the creditor requests to see your credit report. Too many inquiries can lower your score.
Understand Interest, Fees and Penalties
Borrowing money on a credit card is not free. You are charged interest unless you pay your balance in full each month. Interest on credit cards is stated as an annual percentage rate (APR) but is charged each month. You need to understand what your APR is so you will know how much interest you are paying.
You also need to understand how credit card companies charge interest--on the average balance you carry on a daily basis, the average balance you carry each month, or the average balance you carry on a two-month basis. You also need to understand other fees. Most companies charge a fee for late payments or for going over your credit limit. Some companies also charge an annual fee. Understand the charges and fees before signing up for a credit card.
Build Credit Wisely
Signing up for a credit card in college and using it wisely can be a great first step in establishing a good credit score. However, you should refrain from signing up for too many cards to avoid excessive inquiries. You should charge small amounts on the card each month and pay the balance off in full at the end of the month. This will allow you to keep your debt-to-credit ratio low and establish a history of on-time payments. Check your credit report periodically (you can do so for free at AnnualCredit Report.com) to ensure there are no mistakes on your credit report.
0 comments:
Post a Comment