During a recession, the flow of credit tends to tighten up as banks and lenders take fewer “risks.” The result of this is that people who are credit-worthy but have no credit history, such as students, are caught in the middle. Without a credit history, they can’t get credit cards and loans. With credit cards and loans, they can’t establish a credit history.
An old standby practice, piggybacking, was recently eliminated as the new FICO score rules changed how it treated authorized users. In the past, someone with poor or no credit could “piggyback” as an authorized user on an account of someone with good credit. Many parents put their children on their credit card accounts to help them establish credit, the parents were “co-signing” their child’s debts, so it was perfectly acceptable. Unfortunately, people started abusing this and selling “authorized user positions” on their accounts, some for as much as $500 or $1,000 a piece, so FICO had to respond.
Fortunately, credit card companies recognize that students have credit needs and are often supported by their parents, so they’ve created student credit cards that low limits, reasonable rates of interest, and looser credit requirements. Companies like Discover and Citi have always been in the forefront of this and my first credit card was one issued by Citi based solely on my income being defined by my tuition payment.
The most important thing to realize, whether you’re the student or the parent of a student, is that a credit card should not be taken lightly. A lot of students fall into the trap of not recognizing that credit is still money and that you shouldn’t be spending money that you don’t have. I think having a credit card is important, getting one is one of my 40 college money tips, but fiscal responsibility is far more important. One of the great things about student credit cards are that the limits are low but you can still fall very deep into debt. Only spend that which you can repay within the grace period and never carry a balance. If you don’t think you can do that, avoid these things at all costs.
Here are some other tips for smart credit use:
- Pay with credit only if you have the cash for it: If you don’t have the cash to buy something, don’t put it on your credit card. A $10 pizza can become a $100 pizza if you make only minimum payments and stretch it out as long as they will allow it. If you have the cash, you can pay off the bill after the grace period and take the rewards to the bank.
- Shop around: It’s important to review all the terms and conditions of your card and shop around for the best credit card, because small differences matter. A bonus here or a reward there can really help make your money go farther.
- Never carry a balance: When you carry a balance, your grace period goes away. As a student with limited income, you should never carry a balance because that is a beast you are ill equipped to handle. With little to no income, your balance can spiral out of control. You might end up with tens, if not hundreds, of thousands of dollars in debt with nothing to show for it.
- Understand your limits: It’s important to know what your credit limit is so you don’t get a punitive fee for going over your limit. This tip also refers to understanding how much you can spend based on how much you earn. A credit will let you go into as much debt as you want, because they will earn their interest as you struggle to repay it.
- Never pay an annual fee: Whenever I see a credit card offer the interests me, I always look to see what the annual fee is. If the annual fee is more than $0, I don’t even consider the card. Credit cards earn money when you use them, they charge the merchant a small fee, there’s no reason why I should pay them for the opportunity to make them more money!
- Avoid stupid fees: Remember when to make your payments, remember your credit limits, remember everything so that you don’t get dinged $35 for missing your payment by a day (or a minute). Develop good credit card habits and you can use them like a tool, rather than a crutch.
- Know when to walk away: If you can’t be responsible with credit, don’t be stubborn. If you know you can’t spend within your means, cut up your cards, focus on paying down debt, and live a cash-only lifestyle. Credit cards are double-edged swords, they cut both ways. If you find yourself being hurt by them, cut them up, repay your debts, and never use them again.