Student Credit Card and Credit Education Blog

Landis from Greenville, PA brought up some great topics to talk about in a comment on my last post. So I give a shout out to Landis for the inspiration. These are good questions, Landis! I echo Captain J’s thoughts in his comment, but I want to elaborate.

With regard to credit cards:

There is nothing wrong with not using credit cards. If you and your family think that the temptation of spending more money than you have and going into debt outweighs the benefits of a credit card, that’s fine. However, in my opinion, IF YOU ARE CAREFUL, the benefits of credit cards far outweigh the hazards. Here are a couple reasons why:

1) If you are short on cash between paychecks. This is the riskiest benefit of a credit card, because if you spend more than you actually make, you can get into trouble: a debt hole that for many is almost impossible to escape. However, IF YOU ARE CAREFUL, a credit card is a good thing to have on hand when you need to buy something, but won’t have the cash until you get your next paycheck. A credit card is a sort of system to supply miniature loans to people on the spot. Instead of asking someone to borrow $50 for a pair of shoes, you can just put it on your credit card. The key is to pay it off as soon as possible. If you do this, these loans will be free to you, and in a lot of cases, you can actually get paid for it (with rewards programs - but more about that later - see number 4).

2) Emergencies. This is sort of a continuation of the last point. Sometimes you just NEED something. For instance, if your car battery dies while you are shopping in a super store and you need a new one quickly. The problem is, you just spent all your cash on the things you just bought, and you only found out that your battery died when you got back to your car. Or maybe you still have some cash left, but don’t have enough for a new car battery (which can be very expensive). Well, luckily, you have a credit card, and you can go back into the store and buy a new battery, even though you don’t have the cash with you. Instead of wasting time waiting for someone to come jump your car, or wasting time and money by getting it towed, you can be on your way in 15 minutes. An emergency might come up any time, unexpectedly (which is what an emergency is), so it is best to be prepared to handle it. With a credit card, you know you have some way to buy things, even if you don’t have cash.

3) Build credit. This is a big part of a credit card. Your credit determines a lot in your life. It basically indicates how trustworthy you are when it comes to lending you money. If you have good credit, people will be more willing to lend to you and charge you less since they know they will get their money back. They will offer you lower interest rates as an incentive for you to borrow from them since they know they will get their money back. This applies to a lot of things. Car loans, home mortgages, alternative student loans, a loan you might want to take out in order to start a business, etc. If you build good credit now, the benefits in the future will be enormous. For instance, even if your good credit only gets you a 2% lower interest rate on a car loan, if the car you are trying to buy is $30,000, you will be saving $600 in the first year! Now imagine all the other savings you can get with good credit on the rest of stuff you have to buy in your life (like a $250,000 house where 1% on a mortgage can mean thousands of dollars saved).

4) Get paid. Let me say that again. You can get paid for borrowing money! Many credit cards, even ones for students, will pay you (if you are responsible about making payments on time) in the form of rewards. You can get money back for the things you spend money on anyway. Check out the credit card section of www.studentplatinum.com for some good deals (like 5% back on gas!).

5) You can use it to help you manage your spending. Maybe you want to keep track of certain expenses (for instance, how much money you spend buying junk when you stop for gas). You could just use your credit card on those types of expenses to track your spending. A credit card statement is a record of what you spend your money on. With a paper trail, you can easily track your spending since it’s automatically printed up and sent to you. Some companies will actually separate it into different categories for you too. This is only mildly helpful though, since any purchases at a gas station are all lumped under “Gas/Convenience Stores.” There is no distinction between gas purchases and snack purchases.

Again, using credit cards or not is a personal preference, but there are a lot of reasons in favor of using them.

With regard to student loans:

The beauty of student loans through the government (and most private student loans) is that they don’t have to be repaid until 6 month after you graduate, as long as you are in enrolled in school full time. For most schools, this means that you are taking at least 12 credits (or 4 classes). However, in order to minimize the amount you pay in interest, many loans give you some additional repayment options. For instance, many loans will allow you to pay off the interest as it accrues. That way, you minimize the amount of interest you have to pay overall, and you minimize the overall amount of money that you have to repay once you graduate. If you can afford this option, do it. Of course this requires that you have some way of repaying the interest on a regular basis, so you will have to have a job that pays pretty well, especially if you still want extra money for spending and saving. It’s always good to save some money so that you have a cushion to fall back on if you lose your job or take a big hit to your wallet (like when your car breaks down). If you won’t be able to save any money because you are putting it all toward the paying off the interest, this probably isn’t a good option (unless you’ve already got a decent chunk saved up).

If you are really fortunate, you have some other options. Many loans will allow you to start paying them off immediately. If you can, do it. If you don’t need loans to pay for college, you can actually use student loans as a way of building credit. Take out a small loan so that you have some variety in your credit history (variety is part of how your credit is determined - see the article “Your Credit Score” for more information about how your credit score is determined). Just like a credit card, if you pay on time and by the rules, this will help your credit. Student loans have a lower rate than most other loans, so if you are going to use loans as a way of building credit, student loans are the way to go.

For more information on student loans, visit www.studentloannetwork.com. “Financial Aid 101″ is a good place to start.

I hope this helps. Any other suggestions for topics for me to talk about are welcome!

-Brad