While the Card Act—the new credit card law that took effect in February 2010—has had an altogether positive impact on the credit card industry, increasing issuer transparency and adding to consumer rights, it’s also made it harder for people under 21 to access credit. When young adults enter the latter stages of college or graduate school, they are confronted by the same credit-card learning curve that used to be the domain of high school seniors and college freshmen, and they make rookie mistakes as a result. If you're a broke college student, let’s take a look at some of the most common credit card mistakes for newcomers and how to avoid them.
1. Not Building Credit at an Early Age
Building a long and solid credit history is extremely important, as your credit score represents your fiscal responsibility, and the difference between a good and a bad credit score can literally result in thousands of dollars in avoidable expenses. For a college student, using a credit card is the most efficient and least expensive way to start building credit. To start, ask your parents if you can be an authorized user on one of their accounts. This will allow you to kick off your credit history, even if your parents don’t feel comfortable giving you any spending power.
The next step is opening your own student credit card. Even though the CARD Act seemingly prevents most high school and college students from doing this, there are some important caveats to the law. People under 21 years of age can indeed open their own credit cards if able to provide proof of income or get an older friend or relative to co-sign.
2. Using a Credit Card…Irresponsibly
It’s better to lock a credit card away in a drawer or not open one at all than to use a credit card irresponsibly. Beginning your credit history from scratch later in life is also preferable to trying to overcome mistakes you made when young. Therefore, if you don’t trust yourself to pay your bill in full every month or otherwise effectively handle the responsibility that comes with credit, don’t put yourself in a position to fail. Check out this debt app to see how this can become a problem.
3. Thinking Rewards, Rewards, Rewards…
It’s natural for consumers, especially young people, to focus on rewards when comparing credit card offers. Everyone likes free stuff, after all. Unless you are planning to pay your bill in full every single month, however, you’d actually be better served looking for a low interest student credit card with a low annual fee. Once your financials allow you to be free of credit card debt, then you’re ready to maximize your rewards.
4. Carrying a Balance on a Business Credit Card
A lot of recent college grads are opting to start their own companies rather than search for jobs that just don’t exist in the current economic landscape. As such, they get solicitations for business credit cards. If you are planning to use a business credit card to fund your entrepreneurial enterprise, think again.
One of the most important provisions of the CARD Act prevents issuers from increasing interest rates on existing credit card debt unless a cardholder becomes 60 days delinquent. As the CARD Act doesn't apply to business credit cards, a monthly balance held on such a card is at perpetual risk of becoming more expensive all of a sudden. Debt stability is extremely important to a start-up’s success, so all you entrepreneurs out there should either use a personal credit card or a Bank of America business credit card (BofA voluntarily applied CARD Act protections to its business cards) for purchases you cannot pay for in full by the end of the month.
5. Choosing a Debit Card Instead of a Credit Card to Prevent Fraud
Many people, for one reason or another, believe debit cards to provide better fraud protection than credit cards. In actuality though, both credit cards and debit cards from major issuers have $0 liability guarantees, which means that you will be reimbursed for any unauthorized charges. While the level of fraud protection offered by a credit card and a debit card is therefore technically the same, the aftermath of credit card fraud is less severe, given that money is not removed from your bank account as soon as a purchase is made, as would be the case with a debit card. The fact that you have at least 21 days to pay your credit card bill from the time you receive your monthly statement means there is plenty of time to sort out fraud before it truly affects your wallet.