For many first-time college students, pursing a higher education is a journey that comes with newfound responsibilities. Managing money while simultaneously balancing school, work and social obligations proves difficult for many. When embarking on educational pursuits, don’t forget to keep credit scores at the forefront of financial commitments.
There are many ways to go into debt as a student. While building a future through formal learning, remain vigilant in keeping a solid foundation of good credit. The following six scenarios can impact college students and credit.
1. Obtaining Student Loans
In order to pay for rising college costs, a majority of higher education students now attain student loans. Financing schooling costs does impact credit. Whether the impact is positive or negative depends on how the loan is taken out and how it is managed.
When acquiring the initial loan, a hard credit inquiry may make a minor impact on overall credit score. A credit check done by the potential lender may ding a few points off of the total score. The impact is small and can be recuperated in time.
In order to shop for the loan with the best value, the credit reporting system allows multiple credit inquiries in a short period of time. This gives the borrower anywhere from 14-45 days to research the best interest rates and find a loan that meets their needs and budget.
Once a loan has been selected and balances are due, students should remain rigorous about making timely payments. Staying on-track can impact a credit score for the better. By showing the capacity to payback the student loan debt, the borrower strengthens credit and builds a strong credit score.
Conversely, missing scheduled payments can lead to the slow and steady withering of strong credit. Credit scores can soar when managed properly. If students or graduates feel themselves drowning in large student loan repayment, they can contact the loan servicer. Many times, deferment or other alterations can be arranged to make payments more manageable.
2. Using Cards as Income
For the college students and credit card beginners in the audience, it is important to remember that credit cards are not free money or unlimited cash. Being approved for a credit card with a $5,000 limit is not equivalent to a receiving $5,000 payday. Using a credit card to make any purchase, large or small, comes with the obligation to pay back the card balance.
Furthermore, credit card companies may tack on fees in addition to accrued card balances. Common card fees may include the following:
- Late payments
- Charges for foreign transactions
- Annual membership fees
One of the common pitfalls of student spending is utilizing credit cards as a way to make ends meet until cash comes along. For some college students, carrying a credit balance over from one month to the next is their solution for getting through economic hardship. While this temporary fix may seem to suffice for a time, the long-term impact can be difficult to repair.
Credit card interest rates and card fees vary. The cost of paying credit card interest and carrying a balance can add up in a matter of months and may be more significant than most students realize. Applying for credit cards and spending to the limit is a quick way to get into credit card debt and destroy a credit score.
3. Missing Payment Deadlines
Paying off a card balance or loan increment on time has the most impact of any of the credit decisions a college student makes. Payment history accounts for 35% of the points in a standard credit score. After a single missed payment, a positive overall score is said to drop somewhere between 90 to 110 points.
But according to FICO, a single late payment will not cause irreversible damage to one’s credit score. While the score drop may make an initial dent, getting back on track can rapidly repair the damage done.
Significant harm comes to the score of a borrower who consistently shows negligence overtime. Missing multiple or consecutive payments can impair a once-decent score. As a student with many expenses and little cash to spare, don’t postpone the due date. Aside from the credit impact, many major credit card companies will also inflict late payment fees that only add to the total balance due.
4. Paying the Minimum Balance Due
Making only a minimum payment can also negatively impact a credit score. When done consistently over time, paying the minimum balance can become a trap for college students to fall into. Interest payments will rack up quickly and the total payment will only grow. In order to avoid paying outrageous interest fees altogether, students should strive to completely payoff card balances. This is best done by charging only what one can afford.
5. Applying for Loans and Credit Cards
As aforementioned, applying for a loan can take a small rift out of a growing credit score. Likewise, applying for a new credit card can have the same effect. Each time a new creditor obtains a credit application, they pull the credit information. While it does not impact credit to obtain a copy of a free personal credit score each year, it does leave a mark when checked by a potential lender.
In order to prevent credit checks from significantly bringing down a credit score, students should be prudent in the number of loans and credit cards they apply for. Many students are tempted by credit card rewards programs available to consumers. By sticking to a few manageable credit cards, students can better control their spending and avoid the credit impact of card applications.
6. Maxing Out Cards
According to Time Magazine, student debt is being wracked-up by more than just the cost of college tuition. Extra college expenses include school books, transportation, housing and the use of electronic devices. For first-timers facing the price tag that comes with academic study, maxing out credit cards may seem the obvious solution.
Whether paid-in-full or carrying a balance, a card that meets its credit limit poses a significant threat to a teetering credit record. Weighing in at 30% of a total credit score, a factor called credit utilization is a critical component of credit reporting. Credit utilization refers to the debt to limit ratio.
To calculate the debt to limit ratio, divide the current card balance by the maximum card limit. The higher the percentage, the more negative the impact on credit utilization.
To improve credit, consider spreading out expenses to multiple cards. This lessens the debt to limit ratio. It gives evidence that the full amount of credit is not required by the borrower. Another way to help credit scores improve may be to request a higher credit limit. When possible, payoff balances on time. A higher limit will aid credit utilization and may lead to a more stable credit score.
Monitor Credit Activity
When pursing the path towards higher education, don’t loose sight of long-term financial goals. While going to college can impact credit scores in the long run, the affects don’t have to be negative. Apply for a student credit card that builds credit for students and recent graduates. Sign up for the Credit Report Card from Credit.com to get advice, credit scores and a free action plan to monitor credit growth and build a strong financial future.