For many high school graduates, the day they leave for college will be one of the most exciting, and most terrifying, days of their lives.
They’re eager to start making their own way in the world, make new friends, explore new opportunities that their university offers, and just maybe, explore the party scene, now that mom and dad aren’t always around. On the other hand, there’s the fear of change, of knowing that many colleges won’t especially go out of their way to help them solve all their problems, that they’re going to have a heavy course load to manage, and wondering whether or not they’ll have what it takes to “hack it” in the wider world.
For parents, there’s a mixture of pride, joy, concern, and sadness. You’ve watched your little one grow into a young adult over the years, and though you’re eager to see them get out and realize their full potential, you can’t help but tear up at the realization that they’re not a little boy or girl anymore, and you’re not going to see them nearly as much.
For both groups, there’s a great deal of concern about finances. Higher education costs shoot up more and more each year, and tuition isn’t the only thing to worry about. There’s fees, classroom supplies, food, gas, etc. With all of these added expenses, it can be tough to look past the immediate problem of how to pay for it all, and give some consideration to setting up your credit for the future.
Despite the difficulty it may present, if you’re a soon-to-be college student, or the parent of one, you need to give some thought to how you’re going to build your credit, and a credit card is an essential stepping stone to start building your credit history now. In the following, we’ll discuss some of the factors you need to consider in order to find the perfect credit card that will help you start building credit the right way.
The Credit Limit
The first things you’ll want to consider when you start shopping for a credit card, is to look at the credit limit on a card. The credit limit is how much you can charge onto a credit card during the month.
When it comes to the credit limit, this can be a little tricky, and it can be a point of contention between parents and their college student. On the part of the student, you probably think that the higher the limit, the better. If you’re a parent, you probably want to be more conservative, and avoid having your child fall into debt from over-spending right off the bat. In the grand scheme of things, both of you would be right, and both of you would be wrong.
Credit limits are a double edged sword, in that too high a limit can result in you dragging yourself into debt if you’re not careful; conversely, a low credit limit has the potential to decrease your credit score through utilizing too high a ratio. Because most credit and lending agencies don’t want to see you spend more than 35% of your total available credit, too low a limit can lead to you shooting right past that ratio, even though you’re spending responsibly.
To help you gauge a good credit limit, budget out your expected monthly expenses, and then give yourself a high enough limit that you’ll easily afford them, without risking going past the 35% ratio. For example, if you know you’re going to be spending $300 a month between gas, groceries, and miscellaneous expenses, then have a credit limit of at least $1,500. That way, you’re only expecting to spend 20% of your total credit limit, and that will give you some wiggle room for emergencies.
The Interest Rate
The interest rate, in layman’s terms, is how much is charged to your account when you have a remaining balance at the end of the month. Every credit card will have a minimum monthly payment associated with it, and it’s usually fairly low. However, if you fail to pay off your complete balance every month, you will accumulate interest, and this can lead to your debt spiraling out of control very quickly.
There’s a certain amount of trade off you have to accept when it comes to interest rates. Usually, the only way to keep a comparatively low interest rate is to both give up any additional perks, such as rewards points, and accept that your credit limit will be reduced also. We’ve already touched on how, to develop a healthy credit score, you shouldn’t go with a card with too low a limit, so you’ll need to weigh this against trying to keep your interest rates down.
Of course, a sure fire way to prevent interest from being an issue, regardless of the rate, is to pay off your balance, in full, every month. It’s an excellent financial habit to get into early, and will allow you more options when shopping for a credit card.
A final factor to consider, before you select a card, is whether or not there will be a cosigner on the card. While this can really open a wide variety of cards for you to choose from, it also carries some risks. Having a cosigner will help to prevent you from having to settle for a credit card that’s not really a good fit, by using someone with an established history and higher credit score. This will allow you to qualify for a better card.
However, this can backfire terribly if you’re not careful. For the cosigner, it carries the risk that the primary card holder’s habits will have a negative impact on their score. If you choose to cosign for a credit card, and the primary card holder misses their payments, you assume responsibility for them. This can not only impact both scores, but land both of you in court, if neither one pays off the debt.