So you're a college student and thinking about getting a credit card. Well a student credit card can be a powerful tool to help you start building a healthy credit history. Yet, you keep hearing all the horror stories about credit cards. People with mountains of debt that will be paid off around the same time that Twinkies expire. Yet, if you are smart about how you apply and use your student credit card, you can use it as a tool to build excellent credit.

Why is credit important?

Throughout your life, there will be time where you need to make bigger purchases and need to borrow money in order to make them. Houses, cars and school are a few examples of these larger ticket items. Your credit rating will determine how much banks will lend you, and more importantly what interest rate you will receive. Building up excellent credit will ensure that you are getting the best rate and paying the least amount of interest. In addition to future loans, employers often look at credit reports to determine the responsibility of their future employees.

So how can you use a student credit card to build better credit? Here are five things to do and consider.

  1. How much limit is too much limit?
  2. Carry a balance at least once.
  3. Don't carry too much of a balance.
  4. Pay it off like a charge card.
  5. Don't go crazy with credit lines.

How Much Limit is Too Much Limit?

When you are applying for your first student credit card, you need to consider how much of a limit is too much of a limit. Most college student credit cards are designed to be the first credit card for those without any prior credit history, so usually you will get a smaller credit limit. This is the credit card companies protecting themselves from too much liability if people don't pay back their balances. Yet, over time, credit card companies will raise your limit to encourage you to spend more money. Credit limits will affect the overall health of your credit scores; if you have too high of a credit limit, then when you are applying for future loans it will work against you. Those processing applications assume that you will max out your credit limit and be forced to carry that debt.

This means that if you had a higher limit on your credit card, say $8,000 to $10,000, which is higher for a college student, and applied for a fixed-rate, installment-based loan, like a car loan, then the bank would calculate your credit card as being maxed out. This means that the total amount they will let you borrow for the car will be lower because they will view your outstanding balances as higher risks.

You can always lower your credit limit in the future, but most times, you can also raise your limit when needed too. For your credit, it is better to keep it at a manageable limit for you income.

Pay it off like a Charge Card

A credit card and a charge card are two different things. A credit card lets you carry a balance over an extended period, but a charge card must be paid off monthly. If you are looking for the best way to build solid credit, then you should pay off your student credit card monthly. Nothing hurts your credit more than forgetting a payment. Showing that you are able to pay off a credit card over an extended period will significantly raise your credit score. Plus, if you use the student credit card like this, you will build up reward points without paying any money. Top student credit cards off rewards, and you gain them by using you card for purchases. If you will pay off the card within the grace period, then you won't pay a single cent in interest and gain rewards for doing it.

Carry a Balance at Least Once

While it is best to use the student credit card like a charge card, it is important to carry a balance at least once. Why? Most credit card companies will not report activity on your card until you carry a balance. The credit card will appear open but inactive on your credit report, and that will actually hurt your credit score instead of helping it. By carrying a balance once, and the balance don't need to be high, you can ensure the credit card company reports your activity.

Don't Carry Too Much of a Balance

Never go over half of your overall balance. You will look at your credit limit and think, all of that is available for me to use. However, in the eyes of the credit bureaus that isn't the case. If the credit bureaus see you approaching your credit limit on your college student credit card, pretty much any balance over half your limit, then that hurts your credit score. The credit bureaus will deem you a risk, and even if you pay off the balance monthly, it will hurt your credit.

Don't Go Crazy with Credit Lines

A credit line is any loan you open, whether it is an installment loan, like a card loan, or a revolving loan, like a credit card. Studies show that once a person opens up one account, they typically will open multiple others within a short amount of time. The credit bureaus look down on that, and it will lower your score. Even if you open a credit line and close it before opening another, your credit score will be negatively affected. That is why it is important to start by picking the best student credit card, so you don't need to switch, and then to be disciplined and wait at least six months before opening up a new credit line.

Following these rules will help your use of student credit cards and place you on a path toward superior credit scores. Remember, don't miss payment dates, don't over extend your finances and be patience to open doors to future, credit-based success.

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