Credit cards are a lot like relationships: they can be empowering, or they could become the source of major headaches. Like any big decision, there are pros and cons to taking the plunge and opening a line of credit in college. Before signing up for a shiny new card, ensure you understand the risks and rewards.Â
Pros of using credit cards
- Great for building credit
According to an Experian report, more than 62 million consumers in the United States have a thin credit file – in other words, little to no credit history. If you want to buy a house or take out a car loan in the future, it’s important to start adding to your credit file as soon as you can. One way to do that is by signing up for a credit card and using it wisely. This way, you can show future lenders that you’re a responsible borrower with little risk of default.Â
- It helps track your spending
When you’re using cash, it’s easy to lose track of how much you’re spending if you don’t write it down. Buying things with dollar bills can feel like spending ‘free’ money since the transactions aren’t recorded on your bank statements. But with credit cards, you can check your balance online or on your phone to see how much money you have left to spend.
There are plenty of reasons to love credit cards, but rewards are one of the best perks. You can earn points for every purchase with many cards, adding significant savings on travel, bookings, and even online shopping credits. And speaking of travel, some credit cards even offer valuable benefits such as free checked bags and lounge access!Â
Cons of using credit cards
According to Experian’s 2021 Consumer Review, the average consumer credit card debt is $5,221. If you’re not careful, you could quickly rack up thousands of dollars in debt and put your financial health at risk. To avoid overextending yourself, only use your credit card for things you can afford – if you only have $350 in your bank account, you may want to rethink splurging on a pair of $2,000 Yeezys.Â
One major downside to using credit cards is that you can incur interest if you carry a balance from one month to the next. Interest can add up quickly because credit cards tend to have high interest rates, averaging 19.62% as of July 2022. So if you use a credit card, be sure to pay off your balance in full each month to avoid those pesky charges.Â
- Can damage your credit score
A credit card is a double-edged sword: using it wisely can help you build your credit. But if you misuse it, your credit score can suffer. According to FICO’s credit damage data, one 90-day late payment can drop your credit score by 120 points. Of course, this number can vary depending on your credit situation. But mismanaging your credit card can have serious consequences.
How to build credit in college
Building good credit in college can help you secure the best rates on loans and credit cards after graduation. Here are some steps to skyrocket your credit score:Â
- Make payments on time. Payment history accounts for 35% of your credit score, so making all of your payments on time is crucial. Set up automatic payments if that helps you remember, or set reminders in your calendar.
- Keep an eye on your credit report. Review your account regularly to check for inaccuracies and signs of identity theft or fraud. You’re entitled to one free credit report per year from each of the three major credit reporting agencies.
- Get a secured credit card. Start building credit with everyday purchases and on-time payments when you open a Chime Credit Builder secured credit card1.Â
- Keep balances low. Most experts recommend keeping your balances below 30% of your credit limit. So, if your credit limit is $1,000, keep your balance below $300. Maintaining a low balance will help improve your credit score over time.
