Credit is a useful and necessary financial tool. Ultimately, it lets us buy cars and homes without having to pay the full amount upfront.
You need to have a good credit history to make credit work for you. One way to start that history is with a credit card.
All college students should have credit cards. Without a credit card, lenders don’t have any means of assessing whether you’re likely to pay back what you owe. After all, your student loan repayments don’t begin until well after graduation.
There are steps you can take to pick a credit card that fits your financial situation best.
What kind of credit card do you need?
Your individual circumstances will determine the type of credit card you apply for. Whether you have a good credit history, a poor one, or none at all, there’s a credit card that will fit your situation.
The different types include:
- low-interest credit cards
- cash back credit cards
- secured credit cards
- balance transfer credit cards
- store credit cards
Student credit cards
In this case, we’re looking mainly at student credit cards.
To get a student credit card in your name, you have to be 21 years old. You can get one if you’re 18; it just means your parents will probably have to co-sign. In either case, be prepared to show proof of income from your part-time job or paid internships.
Student cards help establish that all-important credit history. They tend to have low fees and sometimes feature rewards, like cash back on purchases. However, you need to look carefully at the annual percentage rate (APR), which can be as much as 25%! Some cards offer an introductory interest rate of 0% for the first six months or year, but then it shoots up.
The link between your FICO score and APR
Most students don’t have credit histories – they are developed over time with your first credit card. If this isn’t your first credit card, though, it’s easy to check your history. According to USAGov, “you are entitled to a free credit report from each of the three credit reporting agencies (Equifax, Experian, and TransUnion) once every 12 months. You can request all three reports at once, or space them out throughout the year.”
One reason to know your credit score (the most widely known brand that offers credit scores is called FICO) is that the higher the number, the lower the interest. In other words, a high FICO score can save you money with a lower APR.
How to build good credit history
When you use your credit card responsibly, you’ll develop a good credit history. This will become increasingly important as you apply for car loans, apartment rentals, and later on, home purchase loans.
A solid credit score can also serve as a financial lifeline in the event of emergency. If an unexpected medical expense comes up, for example, you’ll have an easier time increasing your credit limit on your card or opening a line of credit if you have a good credit history.
The best way to build a positive credit score is to establish good habits. These include:
- Pay off your balance in full each month.
- Make payments on time. Don’t be one day late. This includes minimum payments.
- Don’t spend more than you can repay.
Remember that 25% annual interest? Let’s say you did better than that, and your interest rate is 18%; however, you can only afford to make minimum payments every month. That $1,000 splurge will take you just about 5 years to pay off – if you don’t charge another cent. Plus, the total amount you’ll pay for that original $1,000 purchase will be nearly $1,500.
How to increase your credit card limit
Student credit cards have limits that range between $300 and $3,000. Some, like the Discover it® Student Cash Back, have limits as high as $5,000.
Some credit limits are automatically increased by the credit card company over time. If that’s the case, think before turning down the offer – even if you don’t require a higher limit. That’s because if you keep your card in good standing, a higher credit limit can boost your credit score.
It has to do with your credit utilization ratio. A good one is less than 30%, which means you’re using less than one-third of the total available credit. So, if your credit limit is $2,000, your threshold is no more than a $600 balance owing.
Requesting an increase
Often, you’ll have to contact your credit card company and ask for an increase. It may be an online process or you may have to contact the card issuer personally.
You may be asked to provide a reason for the request. The reason can be for anything from covering an upcoming expense to having a cushion for emergencies. You can also tell your lender you want to lower your credit utilization ratio: In case you need to cover a large expense, you don’t want to risk going over that magic 30%.
Remember that when a lender checks your credit score, that hard inquiry actually decreases your score. It’s a small negative dip, and as you continue to make timely payments and keep your credit utilization ratio under 30%, the higher limit you were approved for will improve your score again. Still, don’t ask for an increased credit limit unless you have a reason for doing so.
How credit card companies are helping during the pandemic
Banks and credit card companies have offered some relief and assistance including:
- waiving some overdraft and transaction fees
- temporarily reducing interest rates
- lowering monthly payments
Typically these forms of assistance are provided on an individual basis, and not as a blanket policy. Therefore, it’s important for you to contact your lender directly if you’ve been impacted by the coronavirus pandemic and need help with your credit card debt.
How to ask for credit card debt help
The Consumer Financial Protection Bureau sets out the steps you should follow when asking for help:
- Tell your lender you’ve lost income because of the pandemic.
- Have a list of questions ready, which we’ll get into below.
- Get a hard copy of the agreement you arrive at with your bank.
That list of questions should be very specific to your circumstances. While not all lenders offer the same assistance, it can’t hurt to ask. Here are some examples of the questions you can have ready:
- Can they defer or lower your payments?
- Are you still able to use your credit card during the relief period?
- Can they remove late payment fees?
- Will they allow you to skip one month’s payment without being charged interest or penalty?
- Could they increase your limit so you have enough credit to buy necessities?