More than 67% of undergraduates have a credit card in their name and just over 9% have access to a credit card as an authorized user, according to a mid-September survey by US News.
Having a college credit card is a great way to build your credit history, but only if you use the cards responsibly. Unfortunately, nearly half of survey respondents say they have credit card debt.
Other survey results:
- Credit card application plans: About 31% of students say they plan to apply for a card in the next six months, and 22.7% say they will apply for a card in the next year.
- Favorite Student Credit Card Features: When asked what features they would most like in a student credit card, 31.7% say there is no annual fee, 16.8% want a card that offers a bonus for timely payments, 12.8% prefer a card that increases the credit limit for responsible behavior and 11.3% want a sign-up bonus.
- Misconceptions about credit scores: More than 79% don’t know that a credit score measures the risk of defaulting on a loan. Over 23% believe it represents the amount of debt you have, 21.6% believe it represents the amount of financial resources you have to repay a loan, and almost 12% believe it measures what you know about borrowing money.
- Understanding the credit utilization rate: Only 30.4% know that their credit utilization rate is the amount of credit they use compared to the amount they have. Nearly 16% think it refers to how often you use your credit card, and 13.6% think the ratio measures how often you use your credit card versus a debit card.
How Much Credit Card Debt Do Students Have?
Of the 46.1% of respondents who have credit card debt, 27% say their credit card debt exceeds $2,000. Here are the results :
The average university student borrows about $32,880 to get a bachelor’s degree, according to the Education Data Initiative. Graduating with student loan debt and credit card debt can be a difficult entrance into the real world. Often those with credit card debt don’t know exactly how credit works.
Many students have misconceptions about credit
Survey respondents were asked a series of questions to assess their knowledge of credit-related topics. In some areas they have done well.
When asked what would happen if they paid a credit card bill late, 62.3% said they would incur late fees. And nearly 48% are aware that the longer they wait to pay their credit card bill, the more it will damage their credit.
But respondents also show a lack of knowledge of credit on other important topics. For example, when asked what a credit score measures, only 20.8% choose the correct answer, which is the risk of defaulting on a loan.
Here are the answers to this question:
The nearly 23% who admit they don’t know is actually an encouraging sign. Credit isn’t intuitive, and if you can recognize that you don’t know how it works, you’re ready to learn more about it.
6 credit card rules for college students
If you are able to build up a good credit history before you graduate, you will be in an enviable position at the start of your career. You won’t have to worry about having a co-signer to rent an apartment. You might even save money on the security deposit because of your promising credit score.
But credit cards also have a dangerous side. Credit cards charge compound interest on the balances you carry from month to month. It’s easy to get into debt if you don’t have a spending plan in place.
Rule #1: Create your financial foundation
Your financial foundation consists of two elements: your budget and your expense tracking system.
Even if you only have a few expenses, you need to keep track. Your financial foundation is designed to help you use credit cards responsibly. Many assume that a budget will make life boring and overly structured. Not true at all.
A budget is not binding – it is liberator. This allows you to spend your money on the things that are important to you.
Rule #2: Choose the right type of credit card
When you are in college, you have the option of applying for a student credit card. There are some great options to choose from. But keep in mind that the Credit Cards Act of 2009 requires those under 21 to prove they have enough income to pay for purchases made with a credit card. Otherwise, you will need a co-signer.
When survey respondents were asked what features they would like to have in a student credit card, the most popular choice is a card with no annual fee. The last thing a student needs is another expense, and luckily many student cards don’t have an annual fee.
If you are not approved for a student credit card, consider a secured credit card. Only 34.4% of students surveyed know how a secure credit card works.
A secured card requires a small deposit, which reduces the risk for the credit card issuer. You get a credit card that you can use for your purchases. The deposit remains in the account until you close your card. If you’ve used the card responsibly, you’ll get your deposit back.
Another option is to become an authorized user on a parent’s credit card. As long as your relative has good credit, you will begin to build a credit score.
If you’re not ready or don’t want a credit card, that’s okay. You may consider getting a credit loan from your local bank or credit union to help you establish a credit history.
Rule #3: Pay your bills on time
Payment history accounts for 35% of your FICO score. Pay all your bills on time and you’ll be well on your way to good credit. And I mean absolutely all of your bills, not just your credit card bill.
There are plenty of free financial tools to help you out. Remember that if you have your financial foundation in place, you will know the status of your expenses, including when bills are due. But you can also set up email and SMS reminders for an extra layer of protection.
Rule #4: Don’t keep balance
Survey respondents were asked what is meant by carrying a balance on a credit card. Only just over a third know this means paying less than the full amount due each month.
Another survey question asked what would happen if you didn’t pay the full balance owing. Almost half correctly understand that your balance would increase each month.
But 20% say carrying a balance increases your credit score. A popular myth about credit scores is that you need to carry a balance month-to-month to establish a great credit score. Honestly, it’s a credit myth that spans generations. The truth is that it can lower your credit score. This is because your balance is tied to your credit utilization ratio, which I explain in rule #5.
Rule #5: Watch your credit utilization rate
Your credit utilization ratio is the amount of credit you have used compared to the amount of credit you have. Credit usage accounts for 30% of your FICO score. This is why a high balance on your credit card can lower your credit score.
The ideal credit utilization rate is 30% or less. Score algorithms look at your usage rate across all of your credit limits. But they also look at the usage rate of each individual card. So you can’t max out one of your cards and not see a dent in your score.
Rule #6: Review your credit report
You can get your free official annual credit report from this website: Annual credit report. Every four months, review a credit report from one of the three major credit bureaus: Equifax, Experian and TransUnion.
Look at the report for errors or signs of fraud. For example, if you see a new account that you haven’t signed up for, that’s a red flag, and it could be a sign of identity theft. If you suspect credit card fraud or identity theft, report it to Federal Trade Commission and follow the steps on this website.