Over 67% of college undergraduate students have a credit card in their own name, and a little over 9% have access to a credit card as an authorized user, according to a mid-September survey from U.S. News.
Having a credit card in college is a great way to build your credit history, but only if you use cards responsibly. Unfortunately, almost half of survey respondents say they have credit card debt.
Other Survey Results:
- Plans to apply for a credit card: Around 31% of students say they plan to apply for a card in the next six months, and 22.7% say they’ll apply for a card within the next year.
- Preferred student credit card features: When asked what features they’d want most in a student credit card, 31.7% point to no annual fee, 16.8% want a card that offers a bonus for timely payments, 12.8% favor a card that gives credit limit increases 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 that you’ll default on a loan. More than 23% think it represents the amount of debt you have, 21.6% think it is the amount of financial resources you have to pay back a loan and almost 12% think it measures how much you know about borrowing money.
- Understanding credit utilization ratio: Only 30.4% know that their credit utilization ratio is the amount of credit they’re using compared with the amount they have available. Almost 16% think it refers to how frequently you use your credit card, and 13.6% believe the ratio measures how frequently you use your credit card compared with a debit card.
How Much Credit Card Debt Do Students Have?
Among the 46.1% of respondents who have credit card debt, 27% say their credit card debt exceeds $2,000. Here are the findings:
The average public university student borrows around $32,880 to obtain a bachelor’s degree, according to the Education Data Initiative. Graduating with student loan debt and credit card debt can make for a rocky entry into the real world. Often, those who have credit card debt aren’t clear about how credit works.
Many Students Have Misconceptions About Credit
Survey respondents were asked a series of questions to gauge their knowledge about credit-related topics. In some areas, they did well.
When asked what would happen if they paid a credit card bill late, 62.3% say they’d get hit with a late fee. And nearly 48% are aware that the longer they waited to pay their credit card bill, the more it would damage their credit.
But the respondents also show a lack of credit literacy on other important topics. For instance, when asked what a credit score measures, only 20.8% choose the correct response, which is the risk that you’ll default on a loan.
Here are responses to that question:
The nearly 23% who acknowledge 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 open to learning more about it.
6 Credit Card Rules for College Students
If you’re able to build a good credit history before you graduate, you’ll be in an enviable position when you start your career. You won’t have to worry about getting a co-signer to rent an apartment. You might even save money on the security deposit due to your up-and-coming credit score.
But credit cards also have a dangerous side. Credit cards charge compound interest on balances that you carry from month to month. It’s easy to slide into debt if you don’t have a spending plan in place.
Rule No. 1: Create Your Financial Foundation
Your financial foundation consists of two things: your budget and your system for tracking expenses.
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 too structured. Not true at all.
A budget isn’t confining – it’s liberating. It allows you to spend your money on the things that are important to you.
Rule No. 2: Choose the Right Type of Credit Card
When you’re in college, you have the option of applying for a student credit card. There are some excellent options to choose from. But keep in mind that the Credit CARD Act of 2009 requires those under 21 to show they have enough income to pay for purchases bought with a credit card. If not, you’ll need a co-signer.
When survey respondents were asked what features they’d want in a student credit card, the most popular choice is a card that has no annual fee. The last thing a college student needs is another expense, and fortunately, many student cards don’t have annual fees.
If you don’t get approved for a student credit card, consider a secured credit card. Only 34.4% of the students surveyed know how a secured credit card works.
A secured card requires a small deposit, which lowers the risk for the credit card issuer. You get a credit card that you can use for purchases. The deposit stays 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 parent has good credit, you’ll start developing a credit score.
If you aren’t ready or don’t want a credit card, that’s fine. You can consider getting a credit-builder loan from your local bank or a credit union to help you build a credit history.
Rule No. 3: Pay Your Bills on Time
Payment history makes up 35% of your FICO score. Pay all of your bills on time and you’ll be on your way to good credit. And I mean absolutely all of your bills, not just your credit card bill.
There’s a vast amount of free financial tools to help you. Remember, if you have your financial foundation in place, you’ll know the status of your expenses, including when bills are due. But you can also set up email and text reminders for an added layer of protection.
Rule No. 4: Don’t Carry a Balance
Survey respondents were asked what is meant by carrying a balance on a credit card. Only a little over a third know that it means paying less than the full amount due each month.
Another survey question asked what would happen if you don’t pay the entire balance that’s due. Almost half correctly understand that your balance would increase every month.
But 20% say that carrying a balance increases your credit score. A popular myth about credit scores is that you have to carry a balance from month to month to build a great credit score. Honestly, this is a credit myth that spans generations. The truth is that it can lower your credit score. This is because your balance is related to your credit utilization ratio, which I explain in Rule No. 5.
Rule No. 5: Watch Your Credit Utilization Ratio
Your credit utilization ratio is the amount of credit you’ve used compared with the amount of credit you have available. Credit utilization makes up 30% of your FICO score. This is why a high balance on your credit card can decrease your credit score.
The ideal credit utilization ratio is 30% or less. Score algorithms look at your utilization ratio across all of your credit limits. But they also look at the utilization ratio on each individual card. So you can’t max out one of your cards and not see a dent in your score.
Rule No. 6: Review Your Credit Report
You can obtain your official free annual credit report at this website: AnnualCreditReport. 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 instance, if you see a new account that you didn’t open, that’s a red flag, and it could be a sign of identity theft. If you do suspect credit card fraud or identity theft, report it to the Federal Trade Commission and follow the steps on that website.