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Have you ever wondered what life will be like if you do not have a credit history? Some college students may not understand what it is all about. According to the article published on CreditKarma.com, there are college students who do not understand the impact that their credit card debt have on their credit scores. In fact, a lot of consumers (69%) revealed that they did not understand what credit scores were when they got their very first credit card. Since the general practice is to give college students a credit card, it can be assumed that these first-time card holders have no idea what a credit score is and how to keep it in good condition.
We all know that credit management is important because it will help make your financial future more secure. After the Great Recession, some people actually tried to live without using credit. When their debts pulled them under after the economy crashed, they made a commitment not to borrow money again. They tried to buy everything in cash. If they did not have the money, then they refrained from buying anything.
It seems like a simple way to go right? Not exactly.
When you do not have a credit score, it will be difficult for you to get a loan with a low-interest rate. Creditors and lenders look at your credit history to determine if you are a responsible borrower. Your credit behavior (how you pay your debts, how much you owe, etc) will be reflected in your credit report. If it is proven that you are responsible with the money that you borrow, they will give you a low-interest loan. If you are irresponsible, they have to protect themselves from the possibility that you will not pay them back by through a high-interest loan.
The thing is, if you do not use credit, there will be no entry on your credit report. How will the lenders know that you are a responsible borrower? If they have nothing to base their judgment on, they will just assume the worst and give you a high-interest loan. This is only one of the things that you have to live with if you do not have a credit history. This is why you need to start building a good credit report even while you are still young. In fact, you can start while you are in college.
5 rules that will help young adults build a good credit report
Even if college students do not earn a steady income, it is possible for them to build a good credit report. It is all about using credit wisely and making the right decisions when it comes to their finances.
According to a study published on ScienceDaily.com, 70% of college students are actually feeling stressed about their finances. Most of the time, this is because they are relying on student loans to get them through college. The mounting debt is worrying them. Half of the respondents revealed that they are worried about their monthly expenses. The financial problems of college students also include the use of credit cards. 55% of the respondents who admitted to having a credit card balance owe less than $1,000. For a college student, this should be a huge deal. The survey revealed that the financial difficulties of college students end up giving them tough choices. This makes it hard for them to study and to keep a careful eye on their finances.
The key to helping college students overcome their financial difficulties is to manage their credit wisely. Learning how to do this is easy if they focus on building a credit history. When you are focused on getting a good credit report, you will be more conscious of your financial decisions.
While this is not an overnight task that can be completed, there are 5 important rules that has to be followed.
Rule 1: Decide to use a credit card.
To build a great history for your credit report, you have to use credit first. As a first-timer, this might be hard to do. Since you are still in college, you need to get permission from your parents. They should be able to help you fill out the application. This card can help you build a credit history because you are borrowing money every time you use it.
Rule 2: Choose the right credit card.
It is very important to choose the right type of credit card – specifically the one that is aligned with your spending behavior. There are different kinds of cards. If there is a store that you go to regularly, getting their merchant credit card might help you earn points. This will allow you to get freebies and discounts even as you stick to your usual spending patterns. If you always spend on gas for your car, then a gas card should be a great idea.
Rule 3: Practice the right payment behavior.
The most simple thing that you can do is to pay your dues on time. This will help you avoid that nasty late payment penalty and will keep bad records from your credit history. To make it even more beneficial, you can choose to pay your balance in full at the end of each month. This way, you do not have to worry about paying more than the value of what you bought. You do not have to worry about any accruing interest rate.
Rule 4: Keep your credit use simple.
Sometimes, people end up making mistakes on their credit history because their credit situation is too complicated. Since you are still in college, limit your use of credit to buying only the necessities. Try not to use it for entertainment expenses because it is easy to overspend. Budget the amount that you are allowed to charge on your credit card. That way, you can put aside the money that will enable you to pay for the balance in full.
Rule 5: Monitor your credit report.
The final rule to follow is to practice credit monitoring. You have to look at your credit report regularly so you can check if your credit behavior is resulting a good history. It is not impossible for credit reports to contain errors. You need to dispute these immediately. You are entitled to receive a free copy of your credit report from the Free Annual Credit Report website. You get one each year from the three different credit bureaus (TransUnion, Equifax, Experian). That means you get three credit reports for free. This habit will also help you monitor if you are a victim of identity theft – something that needs to be reported immediately.
It is important to be conscious about how you spend your money while you are in college. The habits that you develop can be carried over when you graduate and start earning your own money.
Here is a video from Forbes that will give you tips on how to be smart with your spending while in college.
What you do not spend should be saved so you can start strengthening your financial position as early as now. It will not only help improve your credit history (since you do not have to rely on debt for emergency expenses), it will really help you secure your financial future.
Money mistakes in your 20s that can bring down your credit score
There are various mistakes that you are bound to commit – especially when you are a first-time user of credit. Knowing the common pitfalls should help you avoid them. Here are the common financial mistakes that young adults commit – most of which can ruin your credit reputation.
- Living without a budget. Regardless of your status in life, it is very important that you learn how to use a budget. This is one of the basic habits that you have to develop to keep your credit history in good condition.
- Overspending on payday. Another popular mistake that young adults commit is overspending – specifically when payday comes. It is understandable to splurge a little when you get your first paycheck but it is not wise to do it all the time. You have to be wise and refer to your budget to know where every penny should go to – like your debt payments or savings.
- Failing to understand credit. According to an article published on Marketwired.com, some Millennials get the wrong idea about what affects their credit history. In fact, 4 out of 10 of the respondents believe that carrying a credit card balance will help improve their credit score. This is not true. It will actually make you pay more than what is necessary. That money that you waste can be put towards the more important expenses.
Ignoring the need to save. Finally, some young adults make the mistake of delaying their savings. There are many saving goals that you need to focus on immediately. You have to start saving for your retirement – even if you are only in your 20s. You should also build up your emergency fund because that will help avoid the need to borrow money just so you can get out of an unexpected event in your life.
