College Students Are Actually Pretty Good With Credit Cards

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When people think of credit cards and college students, they don’t often conjure up an image of a responsible young adult, either because of stereotypes they’ve been exposed to or their own negative experiences. In reality, college students generally do a decent job managing their credit cards — at least, that’s what one survey suggests.

Most college students (72%) pay off their credit card balances each month, according to a survey by credit bureau Equifax. Of course, not that many students actually have their own credit cards. A recent survey by lendedu.com found that fewer than 40% of current graduate and undergraduate students actually have a credit card in their name. The survey occurred in June and included responses from more than 600 American college students ages 18 to 24, and, of that sample, 42% said they have at least one credit card. The margin of error for the entire sample is plus or minus 4 percentage points.

Only 10% of respondents with credit cards said they carry a balance (the remaining 18% said their parents pay off their balances each month). Even though paying your balance in full doesn’t directly affect your credit score, it’s a smart practice: Paying your statement balance means you’re not incurring interest charges on your purchases (three cheers for saving money), and it can help you keep your credit utilization rate low. (Your credit utilization rate is how much of your credit limit(s) you use, and it’s the second-most influential aspect of your credit scores. You can see how your credit card use affects your credit by getting two free credit scores, updated monthly, on Credit.com.)

Building Good Habits 

It’s a good thing that the majority of students in this survey are staying on top of their credit card debt, given that the majority of college students graduate with student loan debt, and paying off student loans is enough of a burden without also having to worry about getting out of credit card debt.

Regardless of how old you are, paying down credit card debt can be really challenging, because credit card interest rates tend to be much higher than rates on other kinds of debt, and it’s really easy to put off tackling credit card debt by just making minimum payments. Falling into credit card debt isn’t the end of the world, but to dig yourself out, you’ll need a plan. You can use this free credit card debt payoff calculator to help yourself set a goal for getting out of debt (and potentially helping your credit score along the way).

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3 Ways a Credit Card Can Improve Your Credit Score

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Credit cards are convenient and can provide more flexibility in your monthly spending, but they’re also great for establishing and improving your credit.

You probably already know that using a credit card carefully and paying your bill on time without fail can build your credit score, which is increasingly necessary to rent an apartment, buy a home or purchase a car. Strong credit earns you lower rates on home loans, car loans and auto insurance.

Here are three other ways credit cards can help you improve your credit.

1. Create a Credit History

If you’re new to the credit world and haven’t established a credit history, a secured credit card can be a simple way to get started, but there are some things you should be aware of. First, secured cards often carry high interest rates and annual fees, so they’re not something you’ll want to use long term. The goal is to establish and build good credit, after which you’ll want to convert to a traditional credit card with lower interest rates and better terms. That card, too, when used responsibly, will help you maintain a solid payment history, which accounts for 35% of most credit scores.

Second, not all secured credit card issuers report to all three credit reporting agencies. So, for the purposes of establishing credit for the first time, you want to make sure the issuer you are considering does so. That way, you’re getting credit for managing the account responsibly. Remember, if it’s not in your credit reports, you won’t get credit for the account and it won’t help you establish and build great credit.

2. Decrease Your Debt Utilization

Your amount of debt, which includes your “debt usage,” (or “utilization”), accounts for roughly 30% of your credit scores. Getting a credit card with a high credit limit (or, even, raising the limit on an existing one) can be a good thing — assuming you don’t increase your debt in tandem — because it could ultimately result in a lower debt utilization. In general, the lower your balances relative to your credit limit(s), the better. Credit experts suggest keeping this ratio below at least 30%, but if you are trying to improve your score, you may want to aim for no more than 10%.

If you are carrying debt on cards, using a credit card payoff calculator like this one can help you determine how long it will take you to get out of debt — which, in turn, should help improve your credit utilization and your scores.

3. Adds to Your Mix of Accounts

The types of accounts you have on file (or your “credit mix”) accounts for roughly 10% of the points in your credit score. Revolving accounts, like credit cards, are those that have a different payment each month depending on your current balance. Installment accounts, like a mortgage or auto loan, are those that have a fixed payment for a fixed period of time. And open accounts, like a charge card, are a hybrid of installment and revolving credit —the payment is not the same each month and it’s usually due in full at the end of each billing cycle.

Consumers with the strongest credit scores tend to have a mix of different types of accounts. So, if you only have a student loan appearing on your credit report, for instance, adding a credit card could help improve your score.

Of course, credit cards will only help your credit if used responsibly: it’s a good idea to pay all your bills off on time, keep debt levels low and avoid applying for too many in a short window. (Each credit card application generates a hard inquiry on your credit report, which could ding your score.) You can see how your credit card use is affecting your credit by viewing your two free credit scores each month on Credit.com.

More on Credit Cards:

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When Do Americans First Get Addicted to Debt?

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Americans don’t waste any time picking up a credit card habit.

Between the ages of 20 and 30, young Americans typically see their credit card limits skyrocket 450% while their debt rises an alarming 300%, according to a recent report from the Federal Reserve Bank of Boston.

Young adults tend to use their credit cards as a substitute for savings by getting higher credit limits that can help them out in emergencies, says Bloomberg in a story on the Fed report. And once they’ve dipped their toes in, Americans continue to count on their credit cards: 50-year-olds use nearly 40% of their available credit compared with the 50% used by 20-year-olds.

The Fed data shows that debt rises rapidly for Americans in their 20s, before they learn how to pay off credit card debt, and it continues to increase into their 30s. It’s only when American consumers reach middle age that their credit card use levels off. When consumers reach the age of 50, their card use declines and drops to around 20% by the time they hit their 70s.

“Credit and debt show extreme life-cycle variation, much larger than the changes in income or consumption,” Boston Fed authors Scott L. Fulford and Scott Schuh conclude.

Strikingly, Americans who use their credit cards the most are more likely to keep on piling up the debt if they receive a credit limit increase. “Revolver” card users – meaning those who carry a balance from month to month as opposed to “convenience” users who pay off their balance every month – will increase their debt by 1.3% in just three months if they receive a 10% credit limit increase. As a result, the Fed finds, their debt will rise nearly 10% over time.

Only about 35% of American card users between the ages of 25 and 50 are convenience users, while the rest of credit consumers revolve their debt from month to month despite high interest charges.

Getting out of debt is the best way for 20-somethings to begin saving earlier in life, the Fed authors suggest. They note that consumers who opt to revolve debt may be using their credit availability in the mistaken belief that it is a form of wealth.

“Paying off credit card debt has a riskless return that averages around 14%, which no other asset class can match,” Fulford and Schuh write.

Your debt may be having an impact on your credit scores as well. Your credit utilization is the second most important factor in your credit score, and if you’re spending over 30% of your limits, it may be dragging you down. You can check your credit utilization and get two of your credit scores for free every month on Credit.com.

More on Managing Debt:

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