Should You Have a Credit Card in College?

I remember when my family dropped my older sister off at college seeing booths full of exited college students trying to get other college students to sign-up for credit cards.  To me, at the time, credit cards were the ultimate sign of financial irresponsibility. My dad would scoff at the students anytime one of them approached my sister. But now, as a college student who prides herself on her financial responsibility, I can give you a good guideline on when you should open a credit card for college.

Benefits of having a credit card

It’s helpful to have a credit score. It can help you with getting a good deal on loans, buying a house, or even landing a job. It also enforces good spending habits and teaches you to track your cash inflow/ouflow.

Also, having a credit card for longer increases your credit score.  The longer your line of credit has been open, the higher your credit score.

Negatives of having a credit card

If you’re not careful, any debt you have could quickly grow.  Many college students already have to worry about student loans, and don’t need the added stress of credit card debt.

So…Should you have a credit card in college?

You should get a credit card if you follow these criteria:

1.) You have a dependable source of income. (Or leftover income from a summer job.)

2.) You promise yourself to use it regularly, but sparsely.

Do not get a credit card if you want to use it to fund your way through college and expect to pay it off later.  If you have had trouble with excessive spending, practice budgeting yourself for a few months before you open a credit card.

What about for emergencies!?

Ideally, a credit card should not be your go to in case of an emergency.  Find a way to get a job and set aside money in a savings account in case of an emergency.  If you have an emergency that’s going to cost you a few hundred bucks, the last thing you’re going to want to do is use your credit card and have to deal with the interest payments.

Other Options

Become an authorized user.

If you are nervous about handling your first credit card, you can become an authorized user on your parents credit card. Before doing this however, you need to have a very serious discussion with your parents about how you will use the credit card and how they will use it.  Although parents can be quick to assume their children with start making excessive charges, if your parents start missing payments it will hurt your credit score too.

1.) Ask your parents to tell you their credit score.  Do your research on what makes a good credit score to decide how well your parents use their lines of credit.  Do not become an authorized user if you don’t trust your parents to make payments.

2.) Set a budget.  Have your parents give you a spending limit. This will get you into the habit of tracking how much you spend on a credit card.

3.) Know when to cut the cord. You can’t be on your parents credit forever.  Once you feel comfortable with your credit card, it’s time to think about opening your own.

Get a secured credit card.

Did you know there is more than one type of credit card? Secured credit cards require you to put down a deposit, the size of your deposit will then decide how much credit you can draw from. For example, if you put down a $300 deposit, then you will have a $300 credit balance each month.  Forget to pay, however, and the bank will take your deposit as collateral. Although losing a $300 deposit may seem like a lot of money, trust me, it’s better than facing the compounding interest on a regular credit card. After using your secured credit card, you can upgrade to a regular credit card.

Compound Interest: When Less is More

Did you know that you can invest less money, but still end up with more money saved for retirement? Because interest is compounding, money you invest grows larger the longer it is invested.

Here’s a helpful chart to help you understand:

chart

This chart shows $100 growing at 8% annually over 30 years. Compound interest means that the 8% interest rate keeps growing off the interest you earned in all the years prior.  By year 10, your $100 is worth $200!  With simple interest however, you gain $8 per year every year.

Compound interest is the reason why you can invest less money earlier, and get huge gains in the long term.

Take the example of Chloe and Zack.  Chloe invests $2,000 each year from age 20 to 30.  Zack invests $5,000 each year from age 35 to 49.  Zack is investing more money, but Chloe has her money invested for a longer amount of time.  Here’s how their worth compares:

chart (1)

Although Chloe invests $22,000 dollars total, while Zack invests $75,000, she still ends up with slightly more money.  That’s because Chloe’s investment had more time to benefit from the compounding interest. (Interest rate here is 8%.)  Had Zack invested 5,000 for a couple extra years, or started investing a few years earlier, he could have caught up with Chloe, but at a much higher cost.

Not everyone is capable of beginning to invest as early as 20, but everyone should be aware of the benefits of compounding interest.  Retirement is not about being rich, it’s about being money aware.