Being a student in contemporary times is very different from what it was a decade earlier. Students are equally involved in extracurriculars alongside their studies. It could include doing a part-time job, working as a freelancer, enhancing their skills through external courses and certifications, playing a sport, etc. While doing so, students are also experiencing financial independence at a very early stage of their lives, and credit cards play an essential role here. Students have credit cards specifically engineered to fulfil their day-to-day needs; however, as a student, it is crucial to understand how to use this line of credit for their benefit.
The ability to purchase on credit can be luring. It may attract purchases beyond the students’ repayment capacity, which, in turn, can significantly impact their credit score. On the other hand, the student can also use the same credit card to build their credit score for the future. This article provides guidelines on how students can build their credit and the prospects of obtaining a loan.
The students need to understand that a line of credit is a very important benefit for their lives ahead, and it is in their hands to ensure that it is not impacted negatively. Here are a few essential guidelines that students can follow to build a good credit score:
- Self-evaluate before applying for a credit card: Obtaining and using a credit card is easier when compared to repaying the credit card dues. Hence, the student needs to evaluate their repayment capacity and sources of income before applying for a credit card. Not being able to repay the credit card dues significantly impacts their credit scores and potentially impacts their prospects of getting a loan/line of credit in the future.
- Credit card for students: If the finances do allow to apply for a credit card for student, then their first preference should be to take a credit card that is specifically designed for students. These credit cards come with a limited line of credit and ensure that the spending is controlled. Repaying dues in such cases becomes a lot easier when compared to credit cards that allow for higher spending.
- Timely repayments: Credit cards for students, like other credit cards, provide a certain interest-free repayment period to their users. It is the window during which the students are required to repay their credit card dues or make a minimum payment as mandated by their lending institution. Not making a timely repayment can severely impact their credit scores, which are not easily reversible.
- Avoid multiple credit cards: Students are advised to hold just one credit card. They should avoid using multiple credit cards for two main reasons:
(i) Holding and using multiple credit cards can reduce their credit scores, and
(ii) the spending can go beyond their repayment capacity when more than one credit card is used.
Holding a single credit card is easier to manage and ensures that spending is restricted.
- Avoid sharing your credit cards: Students can often succumb to peer pressure and allow their friends to use their line of credit. While this may sound harmless, it may result in the friends defaulting to repay the dues. This payment is now the responsibility of the individual who holds the credit card, which may add additional financial pressure. The situation can also lead to a default, impacting the credit card holders’ credit score and not their friends.
The argument of whether a credit card is a boon or bane for students can be put to rest by a simple explanation. It is a boon when used wisely with utmost care and respect towards the line of credit. On the other hand, it also has the potential to be a bane when used recklessly without worrying about its impact. In other words, the individual chooses its positive or negative implications.
Students should be wary that they have a long life ahead, and having the luxury to avail a credit is not restricted to their student life. As their life progresses, there arises a need to obtain a loan at different stages. It could be a higher education loan, a two-wheeler loan, a car loan towards their first car purchase, a home loan, or a personal loan for emergencies. The students should understand that their acts today can significantly impact their borrowing potential in the future.
A measured approach toward using and repaying their existing line of credit can also do wonders for them in the future. The students can use this opportunity to build on their credit score by limiting their debts and making timely repayment of the existing ones. Such habits can have a positive impact on their credit scores.