By Emily Luong, student @ UCLA
Getting at least one credit card is one of the most important steps you can take in your young adult years. Responsibly using your credit card can do wonders for your credit score, which makes certain parts of your future a lot easier. However, irresponsible usage of credit cards can have the opposite effect — harming you and your financial future. There’s a lot of advice out there on the Internet and by word-of-mouth about how you should use your credit card, and not all that advice is good advice.
The Biggest Credit Card Myth
You’ve probably heard this one: Always leave a small balance on your credit card so you can increase your credit score instead of paying the whole bill.
This is a common misconception shared by well-meaning adults with new credit card owners. The theory is that because credit card companies want profit, paying them extra money via the interest on your balance will make them favor you as a customer and boost your credit score.
That seems to make sense, right? Well, it’s completely wrong! You should not leave a balance on your card if you’re able to pay it all off, especially if you’re looking to maximize your score. This myth comes from a misunderstanding of how credit scores are calculated and how to truly improve one’s credit score.
Who calculates your credit score?
Last time, we covered how your credit score is calculated. Now, let’s talk about who calculates your credit score.
Your credit card company (i.e. Bank of America) does NOT calculate your credit score. So “making them happy” by leaving a balance and paying interest has no effect whatsoever on your score! The company simply reports your financial activity to credit reporting agencies, who then use the given information to generate your credit score.
The three main credit reporting agencies are Experian, Equifax, and TransUnion. They don’t give preference to people who keep a balance on their card and pay interest to the credit card companies. You’re basically paying extra money for no reason — a horrible strategy for college students!
So how can I improve my credit score?
The best thing you can do for your credit is to pay your bill in FULL and ON TIME every month. A missed payment is one of the worst things you can do for your credit score, and will result in late penalty fees ($25-$35 or more).
But If you’re unable to pay in full one month for whatever reason, it’s not the end of the world! Pay at LEAST the minimum payment on time (set by your credit card issuer, usually a selectable option when you pay online). The least you can do is to show your ability to consistently pay off some of your debt.
Here are some tips and strategies for students:
- Put small, re-occurring bills on your credit card. The monthly $4.99 charge for Spotify Premium for Students is a good one to start with! Amazon Prime Student and Netflix are popular ones too. These are easier to pay off than those expensive plane tickets and holiday shopping sprees. You’re paying these small subscription bills anyway, and this way you can get some positive credit history out of them.
- Spend only what you can pay back. Remember that a credit card is NOT free money. Don’t charge more than what’s in your bank accounts.
- Leave your credit card at home when you go on a retail therapy run. We all know how amazing shopping sprees feel… but if you lose track of your spending, it could hurt (a lot) once the bill comes. Use a debit card instead; that way, you’re much less likely to spend more than you have!
- Keep the “30% credit utilization ratio” in mind. You want to use only up to 30% of your available credit limit in order to look like a responsible borrower. Going over 30% can hurt your score. Basically, if you’re given a credit limit of $3,000, that means that you have the ability to borrow up to $3,000 a month, but you should only borrow up to $900 or less if you want to establish and maintain a good credit score.
- Set your credit card bill to auto-pay online. You can choose among the full balance, minimum payment or a custom amount. You can also customize when you want the bill to be paid during a billing cycle & where to draw the funds from (usually a checking account). This will ensure you never forget to pay your monthly credit card bill on time!
By paying your bills in full and on time, you will slowly but surely improve your credit! The goal is to end up in the “good” section of credit score ratings by the time you graduate, and make your way into the “excellent” range by responsibly taking on more credit and paying it off well in your later years.
You want to set yourself up for financial success in the post-collegiate future. By taking these steps toward establishing a good credit history and not falling for this popular myth, you’ll be one step closer to the life you want.