For many young people, going off to college is not only your first time living on your own, it’s your first time managing your own finances. Many students use this opportunity to start building up their credit history with their first car loans and credit cards. If you, or your child, are venturing into the world of paying with plastic for the first time, here’s a few questions to ask yourself as you get started:
What will I buy with credit versus cash? Plan in advance what expenses you’ll use your new credit card to cover. This road map for spending will allow you to accurately calculate what your credit limit needs to be and avoid paying fees for exceeding it. What’s my credit limit? Generally, consumers with the highest credit scores spend between 10 and 25 percent of their available credit. So, if you have a credit limit of $1,000 you should only spend between $100 and $250 before paying off the balance. Your credit history and income are two factors which will determine the limit placed on your card. If you feel it’s too low, ask if the limit can be raised after a period of time. Many card companies will periodically raise the credit limits of cardholders in good standing.
How will I monitor my card balance? Keeping track of how much you’re spending each month is essential to preventing sticker shock when your credit card bill comes each month. Many cards allow you to check your statements online at any time, or will send you an email when you approach a certain dollar amount. Take advantage of these tools or maintain a spreadsheet or balance book for each card.
Can I pay off the balance every month? The most cost-effective way to use a credit card is to pay off the full balance each month. This strategy allows you to establish a good credit history while avoiding paying interest. If you don’t plan to pay off your balance each month, look for cards with a low annual percentage rate (APR).
Does the card have an annual fee? When choosing a credit card, weigh the benefits (such as cash back or rewards points) with the drawbacks (high interest rates or annual fees). Keep in mind that cards with no annual fee often lack the bells and whistles of rewards cards, but can be the better option for your first credit card.
A final piece of advice to help you avoid credit card pitfalls: when in doubt, go without (or pay with debit or cash). If you’re not sure you need to buy something, wait until you know you need it. You’ll avoid buyer’s remorse and an unnecessarily hefty credit card bill.