Financial Tips for College-Bound Students
You are going to college and finally managing money on your own. Congratulations! But…now what? What kind of bank account do you need? What is the difference between a cash back card and a travel rewards credit card? What is a credit score and how do you get one? We are here to answer all those questions and more.
The finance experts here at LowCards.com have teamed up to create the Ultimate Financial Guide for College Students. Read on to learn how to build credit, avoid debt, and keep track of your money in college.
Bank Account Basics for College Students
Getting your own bank account is one of the first big ‘adult’ moves you can make as a college student. This is a place to deposit paychecks, store funds for bills, save money, and manage your monthly expenses.
Even if you already have a bank account, it may not fulfill your needs in college. Many college students move to new cities for school. If your current bank does not have a branch in your new city, you may want to switch banks. If another bank has a better mobile app or savings account interest rate, switching could make your life much easier. Keep this in mind as you explore the banking options near you.
Checking Account vs. Savings Account
Checking accounts are low-fee bank accounts designed for day-to-day activities. This is what you might consider a standard bank account, complete with a debit card and/or paper checks to use for purchases. With a checking account, you can make direct deposits, pay bills, withdraw money, manage funds with a mobile account, and do just about anything you would with cash. These services are usually free, aside from out-of-network ATM charges. Review the fees carefully before signing up for an account.
Savings accounts are not meant for daily purchases. They are set up for saved money – funds that you do no plan to touch often. Savings accounts pay interest over time. You get money just for having your funds sit in the bank. The interest is paid on a monthly or annual basis, and interest rates vary by bank. In most cases, you can make an unlimited number of deposits into a savings account, but you can only make a fixed number of free withdrawals each month. After that, you have to pay a small fee for withdrawals.
Do I Need a Checking Account or Savings Account in College?
We recommend having both a checking account and savings account. The checking account is where you can hold most of your money for bills and expenses. The savings account is where you can put your emergency funds. Most banks have mobile apps that allow you to track all of your accounts at once. If you have a credit card through the same bank, you can monitor your checking account, savings account and credit card through one app. If you need to make an internal transfer from your checking to savings (or vice versa), you can do so in the app.
Bank Account Alternatives
If you do not want a traditional bank account, you could get a virtual bank account. Online-only and mobile-only banks do not have physical branches to visit. You can still deposit funds, use a debit card, and conduct most banking activities. The only difference is that you cannot visit a bank in person if you want to speak to an agent. Digital bank accounts have unique fee structures, so read the terms carefully before signup.
If you want to forego the idea of a bank altogether, you can cash checks at local check cashing locations. The fees for check cashing are high, so you will lose some money along the way. In some instances, you can cash a check at the issuing bank for free. This would only be helpful if your employer sent paper checks from a bank with a branch in your area. Alternatively, you can have checks direct deposited to a prepaid card, and then use the prepaid card like you would a bank debit card.
Credit Card Basics for College Students
Credit cards are great for building a credit score as a college student. With proper money management, you can keep your debt to a minimum while developing a strong credit portfolio. The key is to understand the ins and outs of credit cards before you rack up a high balance. This will help you avoid fees, maximize rewards, and remain in good standing with your card provider. Check out these credit card basics for college students.
Important Credit Card Terms
Consider this your quick-access dictionary for important credit card terms.
- Annual Percentage Rate (APR): The total yearly interest rate for a credit card or loan. It can be broken down to a monthly periodic rate, which is the APR divided by 12. For instance, if a credit card has an APR of 24%, the monthly interest on the card is 2%.
- Authorized User: A person authorized to access a credit card account. This is common for parents who want to help their teenagers build credit before adulthood. An authorized user is not held responsible for payments on the account. Payment history on the account gets reported for the account holder and authorized user, whether the payments are positive or negative. If the card is managed properly, an authorized user can see a credit score boost without being accountable for the payments.
- Annual Fee: A fee charged to the account once per year. Many card issuers waive the annual fee for the first year as a way to entice applicants to sign up for a card. There are also credit cards with no annual fees available, usually with lower rewards opportunities.
- Available Balance: The amount of credit still available on the account. If you have a credit limit of $2,000 and spend $600 on the card, your available balance will be $1,400.
- Balance Transfer Fee: A fee for transferring a credit card balance from one card to another. Balance transfer fees usually range from 3-5%. Additionally, transferred balances may be assigned a separate APR, adding to the cost of the balance. Some cards offer a 0% intro balance transfer rate if you transfer your balance within a certain amount of time of opening your account.
- Billing Statement: The monthly bill for the credit card showing the previous balance, current balance, minimum payment, payment due date, account activity, and other information. The billing statement may arrive by mail or email, depending on your preference. Some billing statements now come with free credit scores as well.
- Cash Advance: Pulling funds from a credit card at an ATM. Cash advances come with high fees and do not qualify for grace periods. Avoid taking out a cash advance as much as possible.
- Co-Signer: A joint applicant for a loan or credit card. This person is usually brought in because the primary applicant does not have sufficient credit or income to be approved for the card/loan. If the principal applicant does not repay the loan or card sufficiently, the responsibility falls on the co-signer. Both parties receive the same positive or negative reports to the credit bureaus.
- Credit Bureau or Credit Reporting Agency: An organization that compiles credit scores and credit reports. The three biggest credit bureaus in the U.S. are Equifax, Experian and TransUnion. Lenders look to these agencies to evaluate information for loan and card applicants.
- Credit Limit: The maximum amount of credit available for an account. If you are approved for a $750 credit limit on a credit card, you can spend up to $750 without incurring an over-the-limit fee.
- Credit Report: A file showcasing an individuals credit history, including open accounts, closed accounts, payment histories, bankruptcy information, and more. A credit report is not the same as a credit score. A credit report is like an itemized list of assignments, while the score is your final grade in the class. Every person has access to one free credit report each year from each of the major credit bureaus.
- Credit Score: A number reflecting your credit worthiness. Positive payment histories, low card balances and rich credit portfolios yield high credit scores. Each credit bureau has their own credit scoring system, in addition to VantageScore and FICO scores.
- Current Balance: The amount of money you currently owe on the card. On a billing statement, it may be labeled New Balance. Paying off the current balance in full can help you avoid interest costs.
- Grace Period: A “free period” between the time a transaction occurs and the payment due date in which the charge accrues no interest. Credit card grace periods are usually between 20 and 30 days long. If you make a charge on the 1st and have a grace period of 20 days, you have until the 21st of that month to pay the transaction without interest.
- Minimum Payment: This is the lowest amount of money you can pay toward the card balance to remain in good standing. The minimum payment may be a percentage of the total balance, a fixed amount, or a combination of factors. Learn How Credit Cards Calculate Minimum Payments.
- Personal Identification Number (PIN): A digital signature for a card, usually consisting of four digits. When you use a card in person, you can choose to sign for a purchase or enter your PIN for security.
For more information, check out our comprehensive list of Credit Card Terminology.
Types of Credit Cards
Here are some of the most common types of credit cards on the market:
- Student Credit Cards: These credit cards are designed for students. They tend to have low fees and low initial balances, along with modest rewards offers. A student credit card can be a great gateway card for someone with limited credit history or no credit history.
- Cashback Credit Cards: Cashback cards provide a certain amount of ‘cash back’ per purchase. This is money that is refunded to the card to use for a future purchase. Cash back can also be applied to monthly credit card payments, in most cases. The value of the cash back ranges from 1% to 5%, depending on the card. Some cards have cash back in revolving categories each month, while others offer a flat cash back rate for all purchases.
- Rewards Credit Cards: There are many types of rewards cards on the market, including points rewards cards, gas rewards cards, airline rewards cards, and others. Each purchase earns a certain number of miles or rewards points. Those points are redeemable for online purchases, airline tickets, gift cards, and other options. Rewards cards may also come with exclusive perks, such as special seating at sports games or dining reservations for high-demand restaurants.
- Secured Credit Cards: Secured cards act like traditional credit cards, but you provide the available balance. If you deposit $1,500 on the card, you will have $1,500 available to you, minus any fees on the card. Secured cards are easy to get, even if you have no credit score. A secured card can help build your credit score because the issuer reports monthly payments to the credit bureaus. Repay any charges you make each month on the card, and the card issuer will make a positive report for the account. If you choose to cancel the card later on, the initial deposit you made will be reimbursed, if your account is in good standing.
- Travel Credit Cards: Travel cards are rewards cards, but they are specifically designed for frequent travelers. The rewards on these cards are typically airline tickets, hotel stays, and other travel-related accommodations. Travel rewards cards are known for having lucrative rewards structures, but they also come with high annual fees. Keep this in mind when selecting a credit card for college.
- Balance Transfer Credit Cards: A balance transfer occurs when the balance from one credit card is transferred to another card. This transfer comes with a fee, as well as a separate interest rate from the card’s APR. Balance transfer cards tend to have lower APRs and introductory rates that waive balance transfer fees. These cards are only desirable if you can pay off the transferred balance before the intro period is over, which could save you money.
- Co-Branded Credit Cards and Store Credit Cards: These credit cards are designed for a specific retailer, restaurant or merchant. They cannot be used at other stores, unless specified. Co-branded cards usually have store-specific rewards offers or in-store discounts for cardholders.
Other Types of Payment Cards
The cards listed here do not impact your credit score. They are effective means for payment and rewards redemption, and they may include fees like credit cards. The way you use the card will not reflect on your credit report though.
- Debit Cards: These cards are tied to checking accounts, allowing you to check your balance at an ATM and pay for purchases without writing a check. Debit cards do not help your credit score, and their funding is limited to the amount of money in your account. If you spend more than that, your transaction will be declined or you will be subject to an overdraft fee. Most debit cards come free with the bank account, but you may have to pay an out-of-network ATM fee.
- Prepaid Cards: Prepaid cards are essentially gift cards you buy for yourself. You load the card with funds via direct deposit, cash deposit, or electronic funds transfer. Then the funds are available on the card like they would be for a debit card. In most cases, a prepaid card will not have rewards or cash back offers. Prepaid cards don’t charge interest rates, but the fees can quickly erode the value of the card.
- Loyalty Cards and Rebate Cards: These cards are similar to rewards credit cards, but they do not have a ‘credit’ element. For example, with a Big Lots Rewards Card, you can get access to exclusive sales in the store and get coupons after a certain number of purchases. You still pay for purchases in store with your credit card, debit card, cash, etc. The rewards are tied to the card and the rewards account, not a payment method.
Do I Need a Cosigner to Get a Credit Card?
You do not have to have a cosigner to get a credit card. However, having a cosigner may expand your options. If you have little to no credit, a credit card issuer has no way to gauge your ability to repay the card. Thus you may only be offered a low initial balance or a secured card where you provide the credit limit. If you have a cosigner with good credit history and/or good income, the card provider is more likely to take a risk with you. The cosigner acts as a safety net of sorts, in the event that you do not make your payments on time.
Getting a cosigner is a big decision for both parties. The person who cosigns your card or loan application will be responsible for the balance if you default. If you do not make payments on time, the cosigner’s credit score will take a hit, just like yours will. Make sure that you can commit to repayment to protect your credit and your cosigner’s credit. If you do this successfully, you should be able to apply for a card on your own within a year.
Credit Card Tips for College Students
Here are some tips for managing your first credit card:
- Don’t apply for the first card you see. There are many student credit cards on the market. Each one has unique terms, fees, and rewards. Before applying for a credit card, research all the options available to you. Choose the card that best resonates with your lifestyle, financial goals and income level.
- Don’t assume someone else’s credit card is the right card for you. Your friend may have a great credit card with low interest and high rewards. However, your friend may also have a different credit score than you or different spending habits. It is important to assess your personal needs and find a card that aligns with them.
- Pay your monthly balance in full. Since students have limited credit histories, the interest rates on student credit cards tends to be higher than someone who has excellent credit. Interest rates can be in the high twenties. Thus, if you carry a balance every month, you will be paying tremendous interest on your purchases. Paying off your balance also sets you on pace for good payment history, and it keeps your credit utilization rate low. All of this will help your credit score.
- Only charge what you can afford. It is very important to use your credit card to buy items for which you have budgeted, then pay your balance in full. If you cannot pay your balance in full, come up with a reasonable repayment plan before you make a purchase. If you cannot pay off the balance in the foreseeable future, you probably should not charge the expense to your credit card.
- Stick to one credit card for now. Once someone has established a long and positive credit history, there are a variety of reasons they may choose to have more than one card. However, when you are establishing your credit, it is best to keep and use one student credit card. This will make it more difficult to overspend, and you will be more likely to pay your credit card on time each month.
- Don’t fall for pre-approval offers. You will get dozens of pre-approved credit card offers in the mail and in your email account. They sound like great options at first, but there is no guarantee you will actually be approved for the card in question. Moreover, there is no guarantee that the card is a good option for you personally. You are much better off comparing credit cards online so you can find the best one for you.
- Avoid expensive fees. If you read your credit card terms and conditions, you will see your new credit card may carry a number of expensive fees, including over-the-limit and cash advance fees. These fees are easy to avoid with proper money management. Monitor your credit card spending to not go over your available limit. Never get a cash advance unless it is an absolute emergency. In addition to fees, cash advances often carry an APR higher than the normal APR for purchases, which makes it an expensive way to borrow money.
- Never loan someone your credit card. You are responsible for any charges a friend might make, regardless of whatever payment arrangement they make with you. If your sister borrows your card to buy groceries, but then decides to buy an expensive sweater, you cannot dispute the charge since you gave her permission to use the card. If your sister does not pay you for the sweater, you still have to pay the card balance. Failure to do so may reflect poorly on your credit score. Additionally, if the card is lost or stolen while in your friend’s possession, you may not be able to dispute fraudulent purchases, as the credit card company could argue you did not do enough to ensure the safety of your card.
- Accept a higher credit limit if it becomes available. This will reduce your credit utilization rate because you will have more available credit compared to the same balance. With this in mind, you should not abuse a higher credit limit. If you think having a higher limit will send you into unmanageable debt, don’t take it. Stick with the boundaries that will preserve your credit score.
- Sign up for email or text alerts. You can receive a text or an email when your payment is due, or if there is irregular activity in the account. This will help you catch issues at the first sign so you can dispute a charge, get a refund, or get a new card issued for you.
How Do Credit Scores Work?
Your credit score is a number indicating how likely you are to repay debts. The higher the number, the more you have proven that you can repay debt successfully. Each credit bureau has its own scoring model, which means that each person has multiple credit scores. Most lenders reference FICO scores, which come from a combination of data from the three credit bureaus. For the purpose of this guide, we will focus on what goes into a FICO credit score.
Components of a Credit Score
Your credit score consists of five main factors, and each factor accounts for a different amount of the score.
- Payment History – 35%
- Credit Utilization – 30%
- Length of Credit – 15%
- Credit Portfolio – 10%
- New Credit – 10%
Your payment history tracks your monthly payments for loans and credit cards. If you have made all your payments on time, this credit score factor will remain high. If you make one late payment, it will make a temporary ding on your credit score. If you persistently make late payments or an account falls delinquent, your credit score will drop rapidly.
Credit utilization is a ratio of the credit used compared to credit available. Let’s say you have three credit cards, each with a $1,000 available balance. That means you have a total of $3,000 in available credit. If you max out one of your cards, you will have used $1,000 of the $3,000. That’s a credit utilization rate of 33%. The lower you can get this number, the better. The general rule of thumb is to keep credit utilization below 30%, but the highest credit scores usually have utilization rates under 6%.
Your length of credit refers to the age of your credit accounts. If you can maintain the same accounts, in good standing, for multiple years, that will reflect positively on your credit. This is why it is important to keep credit cards open even when you are no longer using them, unless they have high annual fees. The available balance on the card will help your credit utilization, and the open account will help your length of credit.
Your credit portfolio looks into the types of debt you have repaid. A diverse credit portfolio shows lenders that you can handle debt in many forms. A person with a personal loan, mortgage loan, car loan and credit card will have a stronger portfolio than someone with just credit cards on file. That does not mean that you should apply for new debt. Your credit portfolio will grow with time. Focus on what you need and what you can repay. Let your credit mix happen naturally.
New credit is exactly what it sounds like. A new credit card or loan can temporarily help your credit score, but it can simultaneously hurt your score. The new account lowers the average age for all your accounts, and a hard inquiry for the application can also hurt your score. If you follow the rule of only applying for credit when you need it, you’ll be in good shape.
Credit Score Ranges – What Is Considered a Good Credit Score?
Each lender has its own view on what makes for a good credit score, bad credit score, etc. Credit scores range from 300-850. FICO defines credit score ranges as follows:
- Excellent Credit: 800-850
- Very Good Credit: 740-799
- Good Credit: 670-739
- Fair Credit: 580-669
- Poor Credit: 300-579
- Limited/No Credit: You may not have a credit score and that is ok, there are still options for you
You should always strive for a high credit score, but do not get too wrapped up in the score ranges. If you have a score of 669, you may still qualify for a credit card that requires good credit. Lenders take into account credit history, income, and many other factors when approving an application.
Do Student Loans Affect Credit Scores?
Yes, student loans do go on your credit reports and will impact your credit score. If you are in deferment, the loan payments will not impact your score right away. The debt will still show on your credit report though. Once you are out of deferment, you must make at least the minimum monthly payments on time each month to maintain your credit score.
If you have defaulted on one or more student loans, you may not be able to qualify for a mortgage loan or personal loan. Most lenders will not accept an application until the account is out of default. This takes a minimum of six months to complete. Negotiate for a student loan payment you can afford with your current income, and pay more toward the loan as your career progresses. If you can avoid student loans altogether, that would be the ideal solution!
Tips to Build and Boost Your Credit Score
What’s the easiest way to build credit in college? These tips will get you started:
- Apply for a student credit card or secured credit card. These are the easiest cards to get approved for, and they can act as a jumping point for your credit. You may only be approved for a small credit limit at first, but that can increase over time.
- Make your daily purchases on your credit card. Anything you would use your debit card for, use your credit card instead. Then pay your balance in full every month. Don’t spend more than what you have in the bank.
- Pay your bills with your credit card, but note the fees. Your utility company, internet provider or phone company may charge a fee for paying by credit card. If you choose to pay a bill with your card, you can repay the card during your grace period.
- Don’t apply for multiple lines of credit at once. Don’t get a car loan, a personal loan and a credit card all at the same time. Instead, stagger these milestones over one or two years.
- Always make your credit card and loan payments on time. Ideally, you should pay your card balance in full each month. If you cannot do that though, at least make a minimum payment before your bill’s due date. This will keep your account in good standing.
How to Find the Right Credit Card for College
At LowCards.com, we make it easy to find the right credit card for you. Browse for cards based on your credit score, desired interest rate, rewards opportunities, and more. Check out our Credit 101 resources to learn even more about how to build and manage credit in college.