From student to cardholder: What every new grad should know about credit cards
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As the strains of pomp and circumstance fade, many new grads are trying to figure out how to manage life in the 'real world.' Not surprisingly, money management is—or should be—at thetop of the list of things to consider. While it's true that having savings provides financial security, credit cards play a bigger role in getting you closer to living the post-school life you want.
That's because credit cards are essential to establishing a credit rating, which in turn impacts how likely you are to secure an apartment, be approved for a cellphone and plan, or get a car or personal loan. Without a credit rating/history, even a generous chunk of change in the bank won't help you begin forging your own path.
But before you sign up for the next offer that pops up on your screen or lands in your mailbox, it's important to recognize that that little piece of plastic comes with big responsibilities. If you don't manage it properly, you can end up digging a hole instead of building a future.
Some key dos and don'ts to building good credit and avoiding debt include:
Dos:
- Pay your bill on time and in full: This is the single most important factor in building a good credit score. Aim to pay off the entire statement balance each month to avoid interest charges.
- Set up automatic payments: This is the best way to ensure you never miss a payment and avoid late fees.
- Keep spending in check: Experts recommend spending only 10-20 percent of the available credit to establish a strong credit score.
- Monitor your credit report and credit score regularly: This helps you catch errors, identify fraud, and track your progress.
- Read the fine print: Make sure you understand the terms related to interest rates, fees, and grace periods to avoid 'surprise' rate hikes and fees.
- Weigh reward options against your spending habits: To make the most of rewards and points options, review your current spending to identify where you spend the most money consistently. Look for cards that align with your spending and offer the benefit you prefer.
Don'ts:
- Carry a balance from month to month: Interest charges can accumulate quickly, and rates can even climb if you don't pay down your balance, trapping you in a cycle of debt.
- Max out your credit card: Pushing your credit to the limit can lower your score.
- Apply for multiple cards at once: Applying for too many credit cards in a short period can negatively impact your credit score and increase your risk of rejection.
- Ignore statements: Review your credit card statements to identify billing errors, fraud, eliminate recurring charges, and track interest and fees.
- Make late payments: these will greatly impact your future financing and will stay on your credit report for 7-years.
- Use your card for cash advances: While credit cards offer easy access to cash, they typically come with high fees and interest rates.
Getting your first credit card is an important step in your financial journey. How you manage it today will have a lasting impact on your credit history and financial stability for years to come. If you're uncertain how to choose or manage a card, talk to a trusted financial advisor. Your future self will thank you.
Scott Cowlin is Pittsfield Cooperative Bank’s vice president of relationship banking. He has been in banking and helping customers with their finances for more than twenty years.
