When you’re out on your own, it’s you making the calls. Do you want to cook tonight or order a pizza? Up to you. Should you hit the books or take a night off and hang out with friends? Your decision.
Remember—the bad choices will catch up with you. The same holds true for your credit decisions, and those bad choices can stick with you for years to come, making it hard to land a good job or even qualify for a house or apartment. Making good credit choices is all about responsibility and restraint. Here is what you need to know about credit to get you started on the right foot, so you’re not kicking yourself later.
Use Credit Responsibly
Choose the right card. As a young adult with little or no credit history, you likely won’t qualify for the best credit cards on the market, but that doesn’t mean you should take any offer that comes your way. Always look for the costs of any credit offers that you’re considering. You’ll want to look at annual fees, Annual Percentage Rates (APR) and other details. Consider using a prepaid card as practice paying with plastic and tracking your expenses while waiting for the right time to open your first credit account.
Only put on the card what you can pay off each month. Getting behind on credit card bills makes catching up difficult as interest fees stack up. A good rule of thumb is to only use your card for expenses that you know you’ll be able to pay off when the bill comes due.
Create a solid credit history. While it’s important not to get in over your head with credit card debt, you also want to create a positive credit history for your future. If you avoid cards altogether, you won’t have any credit history when you want to make important purchases like a home or a car. A good credit history can have a ton of benefits—lower rates on loans, better car insurance rates and rewards like travel or cash back for some credit cards.
A Tale of Two Students
Taking a look at the stories of Carissa and Spencer can help illustrate how good and bad credit behavior can make a big difference down the road.
Carissa was a little jealous when her roommate started using a credit card to go to concerts and buy new clothes. Carissa waited to get a credit card until she got a part-time job and qualified for one without an annual fee and with a low APR. Once she got her card, she didn’t want to get in over her head. She only used her card for everyday expenses she could afford to pay off at the end of the month.
Spencer began applying for credit cards as soon as he started getting offers. He was excited by all the cool stuff he was able to buy with the cards. He planned to get a good job after college and figured he’d pay off his credit card when he was making the big bucks. In the meantime, he made just the minimum monthly payments.
A Year After College
Carissa nailed her interview at the big firm she applied to. She made pretty good money and started to enjoy some of the things she wasn’t able to during college—nice new clothes for work, a fancier apartment and the occasional concert. Her friends wanted to go on a big trip to Mexico to celebrate their new jobs, but Carissa knew that wasn’t in her budget yet, despite her new position. Because of her responsible use of credit, Carissa was able to increase her credit limit from a few hundred to several thousand dollars, which improved her credit score, but she had no interest in getting close to her limit. She maintained her credit for the purchase of her dream house.
Spencer graduated and started looking for jobs. He had maxed out his credit cards while in college and was starting to become stressed when the bills came each month. He figured it was still only a matter of time before he landed a great job and could easily pay back his cards. Unfortunately, several companies passed on his job applications when they took a look at his credit and thought he may be a risky candidate.
10 Years Down the Road
Carissa just bought her first home and has been promoted in her firm. She was able to qualify for a great rate on her mortgage and had money left over each month to add to her savings. She set aside spending money and likes to take a vacation once or twice a year, although she always looks for good deals so she doesn’t have to rely on credit. She often puts big purchases on her credit card to get great rewards, but still pays off the balance right away or within a short period of time.
Spencer did finally get a job but isn’t making the kind of money he expected, so he lives with a roommate and is slowly but surely chipping away at the debt he accumulated when he was younger. He no longer spends beyond his budget, and although he doesn’t have much left after paying his bills, he’s saving what he can each month. He’s improving his credit and hopes to someday own a home.
This article is intended to provide general information and shouldn’t be considered legal, tax or financial advice. It’s always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.