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Today’s post is based on a discussion I had with my third year undergraduate students.  It was clear from the discussion that students need more information how to use credit cards effectively.  There is the general consensus that it is overwhelming and confusing dealing with credit cards and its many implications.  As a result, I will be discuss credit card basics and how more importantly how to use them effectively.

The first thing that students have to understand is that a credit card is a weapon (referencing last week’s blog).  It is a piece of plastic that can be used to protect you and build you up or it can be used to destroy you. Knowing how to handle this weapon is crucial to your financial success. Credit cards are issued by credit card providers and are conduit for making payments both off and online, nationally and internationally. It is vital that students understand the importance of both having and using a credit card properly, because a lack of knowledge will literally cost you dearly.

The moment you apply for credit card or borrow money, your credit history starts recording, it’s like hitting the record button on your camera. A credit file is open in your name and information is regularly updated with all debt related financial information. In Canada these credit files are maintained by either Equifax Canada or TransUnion Canada. The credit report contains information about your loan paying history and the status of your current credit accounts. Lenders use these reports to make lending decisions.

Your credit report is different from your credit score. A credit score is a three digit number that is calculated based on the information on your credit report.  This score is used to compare you to other clients to determine how much risk you pose. In Canada the credit scoring scale ranges from 300 to 900.  The higher your score it means you present less risk of defaulting on your debts. A good credit score is crucial because it determines whether or not lenders will lend you money for a house, a car, or any other type of loan/credit you would need. In some cases it can determine whether or not you get a job.

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For university students it is important to start early building a good credit score because it will allow you to enter the world with a solid financial foundation when you graduate. Here are a few ways that university students (or anyone for that matter) can start building their credit.

Piggyback on their parents

When you are a student without a source of income it is difficult to get a credit card. It is possible, however, to start building your credit if you become an authorized user on your parent’s account. If your parents make you an authorized user on their card you will start creating your own financial footprint. Your credit score will increase once your parents have good credit.

Get a secured credit card

Another option for a student is to get secured credit card. A secured credit card is one that requires you to make a cash deposit as a guarantee of on-time payment. This cash deposit can be equal to or larger than what the limit is on the card.  You can use this card in the same way as you use a regular credit card the difference being that if you default on your payments the credit card issuer will use your deposit.

Get your own student credit card

There are many options available to students to get a credit card in their own name. Here is the link for you to check out some possible options:

http://canada.creditcards.com/college-students.php

It is important that you a credit card that is right for you. Having your own credit card comes with a lot of responsibility. It means that ensuring that payments are made timely rest solely on your shoulders.

Stay in the lines

By this that I mean use your credit card only when you need to and make sure it’s for small intermittent purchases.  Avoid big-ticket buys, except in case of emergency. Your credit card is not free money nor is it an eternal source of funds. It’s a loan that you must repay and if you don’t there are serious consequences that will haunt you for a very long time into the future.

 PAY Off your Balance on time

Nothing hurts your credit score more than late payments. The best thing you can do to build a good credit score is to pay your bills on time. This may be  the simplest advice to build good credit, but it is not the easiest advice to follow, especially if poor choices are consistently being made.

Pay ALL your other bills on time

Your credit score is not solely based on your credit card transactions. It is based on all types of loans and payments that are due. This includes your student loan, library dues, parking fines, internet and phone payments all get reported on your credit report and it is reflected on your credit score. Management of all bills reflects the level of risk you pose on defaulting on your payments.

Pay attention to your balance to limit ratio

It is advisable to keep your account balances below 70%-75% of your available credit. Avoid maxing out credit because credit card companies want to give you credit when you don’t need it and when you actually do, they won’t give it to you! When you don’t need it means you have the resources to pay without taking credit and thus you’re a low risk client. When you don’t have the resources to pay and you really need credit, they won’t give it to you because now you’re more risky than someone who doesn’t need it!

Don’t apply too often

If you apply for several credit cards at once or over a short space of time, it raises a red flag because lenders see it as a sign that you are in financial difficulties. It makes you look desperate and needy for credit.  Note that when you move to a new city and apply for a new mortgage, new loans and utility accounts as well as car rental inquiries your credit score will take a hit. When you check your own credit history or when existing businesses check for updates on your file it does not affect your credit score.

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From this brief discussion   I am sure that you realize that having a credit card comes with a lot responsibility.  Part of effective credit card management is really getting your act together.  Being financially successful is a choice you make for yourself, it doesn’t happen by accident. It requires discipline and having clear goals for yourselves. You can’t reach your destination if you don’t know where you are going. It all starts with you and  if you follow the golden rule of spending less than you earn/have, then you’ll be ahead of the game. In the end it all boils down to being conscious of your spending decisions and making good choices and day after day. On June 15th  wear purple to remind yourself to do just that!

https://www.youtube.com/watch?v=SuXF5QJeIgw

 

Dr. M

http://www.radhamaharaj.com/

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