Easy Ways to Avoid Ruining Your Student Credit
A good credit score is very important
When it comes to credit, it takes a while to build up your score and just a few mistakes can ruin it. With that in mind, here are some ways to avoid ruining your credit before you’ve even chosen a major.
Don't Make any Late Payments
Making your monthly payments on time will be one of the most important factors in not ruining your credit score. This means that you should always make at least the minimum amount that is due each month.
If you think paying your credit card bill late every once in a while, isn’t a big deal, you’re definitely wrong. Your payment history is the most important factor that makes up your FICO score. This means a single late payment could cause serious damage to your score, but it also means multiple late payments could harm it even more. Lenders want to see a consistent history of paying back on time and will be more likely to lend to you at better rates if you can demonstrate this.
The mistake I made in college was not to pay all my bills on-time. The truth is that once your debt starts growing with interest, it can be very hard to pay if off, especially in your early 20s, when your salary is at its lowest point.
Creating a budget while in college is a great way to track spending and understand where your money goes. Here’s how you can start budgeting now and work toward your bigger financial goals.
Keep your Credit Card Balance Low
Just because your credit card has $5,000 in credit available doesn’t mean you should use it all without paying it off entirely each month. Credit utilization is very important for your credit score. The rule of thumb is to keep your credit utilization ratio around or lower than 30%. This means that if you have a monthly credit limit of $1000, at the time that your payment is due, you should try to keep your outstanding balance lower than $300 to have a more favorable impact to your credit score.
Most importantly work on separating the expenses into fixed vs variable expenses so you avoid the temptation of overspending. After you listed your monthly expenses, it’s time to categorize which are fixed and which are variable. Consider having two bank accounts- one for fixed expenses such as tuition, rent, car insurance, groceries, debt repayment and the other for variable expenses such as the gym membership, dining out and entertainment purchases. When you need money for entertainment just take cash so you don’t tap into the account for must-pay bills.
Once you label fixed and variable expenses, list how much you spend on each expense per month. Refer to your bank and credit card statements to get the amount.
If your income were to decrease, you could always cancel your gym membership, postpone a vacation or reduce your takeout spending without much fallout. But you’re likely always going to have to pay for rent/room and board, transportation and insurance.
If you can’t afford your lifestyle, it’s time to make adjustments. This may include reducing the amount of money you spend on variable expenses, such as limiting takeout dinners and cutting streaming subscriptions that you don’t use regularly.
Treat your Credit Cards as a Debit Card
Credit cards can seem tempting and like free money. But to avoid the temptation of overspending, treat your credit card like a debit card, and avoid using it unless you truly need it and you can pay it off right away.
For example, If you charge $3,000 to a credit card with a 17% APR, and only pay the minimum each month — it’ll take you 10 years to pay off your initial balance, by which time you’ll have paid more than $2,200 in interest.
That’s why it’s a good idea to keep low credit card balances and no overextend your credit utilization. For more information about how to build your credit, read the following article.
Apply for as many scholarships as you can. Unlike credit card debt, student loan debt can almost never be discharged in bankruptcy, so it is extremely important to put a plan together to paid student loans off as soon as possible.
Getting an early start on building credit can help you achieve your financial goals before and after graduation, as well as help you obtain lower interest rates in the future. Just make sure to practice smart credit habits, like keeping your debt at a minimum, avoiding opening or closing too many cards. If you follow this advice, your credit score should never hold you back from your financial goals.
If you need to repair your credit, there are companies such as CreditNerds which offers a unique, free credit repair service and works with creditors as well as credit bureaus to find and remove negative items on clients’ credit reports. Additionally, CreditNerds provides educational resources along with the credit audit to assist clients with expanding their credit knowledge.