Credit can be your friend, if managed properly

Column by Adam French

There are many phrases that can strike fear in any college student’s mind — “final exams,” “new-edition required textbook,” “we’re out of beer,” “Mr. Gillispie will be driving you home” and so on.

One word that is truly scary for a lot of college students is “credit.” However, credit is not something we should be scared or unsure of and is something that should be managed — even by college students — in order to become an asset as opposed to a burden it requires careful management to remain such.

The pure fact of the matter is that many people simply do not know how to manage credit, and the problem in too many cases starts during the college years. The U.S. currently carries about $800 billion in credit card debt, according to ABC News.

I propose the following three steps to proper credit management for college students that will put us on the right track for financial success.

First, be selective in choosing a credit card. Over five billion credit card solicitations are sent out in the U.S. annually, and only 0.4 percent of these solicitations are answered. Since we have this vast number of cards to choose from, we need to use it and carefully weed out the credit cards that sometimes doom their customers from the start.

Second, we should look for just one credit card — multiple cards is a huge no-no for long-term credit success. The cards should have no annual fees, a minimum payment rate that is higher than the interest rate of credit purchases, and importantly, a credit card issued by a large, reputable financial institution or stable credit union.

Just as with Roth IRAs in one of my earlier columns, credit card issuers are not all the same, and the success of the issuer should at least be a factor in choosing the right credit card.

Don’t let credit card gimmicks (personalized cards, for example) or rewards systems that give their customers paltry reward points blind you in choosing a credit card either.

Finally, treat credit for what it is: credit. Where a lot of people run into a problem with credit cards is confusing credit for cash. Credit is not a substitute for cash, and a fiscally conservative approach should be in place on using credit for purchases.

The basic rule of thumb — so basic it seems trivial — is to not buy things on credit you can’t afford to buy in cash. While simple, this rule has been constantly abused, to the point that the average household credit card debt is $9,300 for the roughly 80 percent of U.S. households with at least one credit card.

One of the major problems with using credit for many consumers is that they only make the minimum payment required each month, and in many cases their debt grows even as they make this payment.

The rule of thumb in this case, and the most important rule in building and managing credit, is to pay off all credit card debt immediately in the first billing cycle after the purchase was made. This allows the credit limit to grow and the credit score to improve.
Additionally, payments of credit should be made with cash-on-hand, not more credit. If this is not possible, simply do not make the purchase in the first place.

Managing credit requires careful protection of this credit, as well. This means protecting yourself from identity fraud at any and all levels. Stolen credit cards should be immediately reported, personal information should be shredded, Internet accounts should be closely monitored and business transactions on credit should be limited to reputable, safe places, both online and in the store.

This list is not exhaustive of all the credit protecting techniques; a full list of identity theft and identity fraud prevention techniques is available at the U.S. Department of Justice’s Web site.

Another credit protection technique is to not monitor and check your score repeatedly, as excessive credit checks actually can lower the overall credit score. An annual check under regular circumstances is sufficient and should not hurt the score.

Starting off your life as a professional with high credit is much more enjoyable and lucrative than with bad credit, and bad credit is like an addiction in that it is hard to shed in the future.

Taking the right steps in college to avoid bad credit and turning your credit score into an asset has huge future dividends, but these college years are truly where the foundation is laid toward this success.

Adam French is an MBA graduate student. E-mail opinions@kykernel.com.